econ problem sets.pdf

Bank of americas boa balance sheet indicates assets

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Bank of America’s (BOA) balance sheet indicates: Assets Liabilities Reserves \$40,000 Checkable deposits \$100,000 Loans outstanding \$50,000 Treasury securities \$10,000 MUST SHOW FORMULA AND CACULATION FOR 1a AND 1b Assume the Fed sets the reserve requirement at 10%. a. BOA must maintain required reserves of \$_______________. Formula (write out formula #1a): _________________________ b. BOA has excess reserves of \$_______________. Formula (write out formula #1b): _________________________ c. BOA can make loans or create money by a maximum of \$_______________.

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3. A single bank can safely make loans only up to its excess reserves because: 4. If a bank uses excess reserves to make a loan, this action by itself will _______________ the money supply and _______________ the economy’s wealth. -2- Ch15 5. The entire banking system Max change in money supply = ______________________ × banking system’s excess reserves 6. The purpose of this exercise is to illustrate the multiple expansion of bank deposits in a fractional- reserve banking system . Assume the Fed’s legal reserve requirement is 10%. The consolidated balance sheet of the U.S. banking system indicates: Assets Liabilities Reserves \$40,000 Checkable deposits \$100,000 MUST SHOW FORMULA AND CACULATIONS FOR 6a – c AND 7a – c. a. The simple money multiplier equals _______________. Formula: b. The banking system has excess reserves of \$_______________. Formula (write out formula #1a): Formula (write out formula #1b): c. Loans and the money supply can be expanded by a maximum of \$_______________. 7. The purpose of this exercise is to show what happens to the maximum money-creating ability of the banking system when the Fed lowers the reserve requirement . Assume the Fed’s reserve requirement is 1%. Use the balance sheet in question 6. Must write out the mathematical formulas and show your calculations
a. The simple money multiplier equals _______________. Formula: b. The banking system has excess reserves of \$_______________. Formula (write out formula #1a): Formula (write out formula #1b): c. Loans and the money supply can be expanded by a maximum of \$_______________. 8. The banking system can create money by a multiple of its excess reserves because: NAME: __________________________ PROF. H.J. VAN BOVEN CLASS DAYS & TIME: ____________ ECO 2013 / MACRO APPLIED LEARNING PROBLEM SET (2 pages) Chapter 16: Interest Rates and Monetary policy 1. Two reasons why people want to hold money are a. the _________________________ demand for money and b. the _________________________ demand for money 2. The market for money, interest rates, and bond prices Assume the Federal Reserve increases the supply of money . a. Draw a demand for and supply of money graph showing an increase in the money supply. b. The interest rate would ____________________. c. The amount of money balances held by the public would ____________________ d. because the opportunity cost of holding money ____________________. e. Bond prices and interest rates are ____________________ related.

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3. Monetary policy a. The Fed influences the nation’s money supply by changing the amount of __ __ __ __ __ V __ __ held by commercial banks. If the Fed wants to increase the reserves in the banking system, which tends to increase the money supply , indicate how the Fed should manipulate its instruments of monetary control.
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