8 - Banking Homework Unit 8:Conceptual Problems Follow the...

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Banking Homework: Unit 8 Conceptual Problems : Follow the impact of a $100 cash withdrawal through the entire banking system, assuming that the reserve requirement is 10 percent and that banks have no desire to hold excess reserves . Deposits fall by $100 and reserves fall by $100. The bank (Bank A) needs to increase its reserves by $90 in order to meet the required reserve ratio. To raise the $90, Bank A will sell $90 of securities to someone. The deposit account of the person who purchased the securities will fall by $90, as will the reserve balance of his bank, Bank B. Bank B now needs to increase its reserves by $81 in order to meet the reserve requirements so it will sell $81 of securities. This continues until deposits contract by $100/0.1 = $1000 . Compute the impact on the money multiplier of an increase in desired currency holdings from 10 percent to 15 percent of deposits when the reserve requirement is 10 percent of deposits, and banks’ desired excess reserves are 3 percent of deposits . When desired currency holdings = 10% of deposits, m  =  When desired currency holdings = 15% of deposits, m  =  Consider an open market purchase by the Fed of $3 billion of Treasury bonds. Show the impact of the purchase on the bank from which the Fed bought the securities. Then, using the assumptions in problem 2, compute the impact on M1 .
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