money hw4 - Homework 4 1. Suppose that the required reserve...

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Homework 4 1. Suppose that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves, and the public's holdings of currency do not change. Using T-accounts, show what happens to checkable deposits in the banking system when the fed sells $2 million of bonds to the first national bank There will be a $2 million decrease in reserves at First National Bank and a $2 million increase in securities. At the Fed, there is a decline of $2 million in reserve liabilities and a $2 million decline in securities (assets). First National Bank Assets Liabilities Reserves -$2 million Securities +$2 million Federal Reserve Assets Liabilities Securities -$2 million Reserves -$2 million The monetary base is defined as currency in circulation plus reserves. The $2 million drop in reserves means that the monetary base fell by $2 million. 2. Suppose that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves, and the public's holdings of currency do not change. If the Fed buys $1 million of bonds from the first national bank, but an additional 10% of any deposit is held as
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money hw4 - Homework 4 1. Suppose that the required reserve...

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