Complete
all questions listed below. Clearly label your answers.
1.
What
determines whether a financial asset is included in the M1 money supply? Why
are interest-earning checkable deposits included in M1, whereas
interest-earning savings accounts and Treasury bills are not?
2.
Why
are banks able to maintain reserves that are only a fraction of the demand and
savings deposits of their customers? Is your money safe in a bank? Why or why
not?
3.
What
is the Federal Funds Interest rate? if the Fed wants to use open market
operations to lower the federal funds rate, what action should it take?
4. Suppose that the reserve requirement is 10
percent and the balance sheet of the People's National Bank looks like the
accompanying example.
a.
What
are the required reserves of People's National Bank? Does the bank have any
excess reserves?
b.
What
is the maximum loan that the bank could extend?
c.
Indicate
how the bank's balance sheet would be altered if it extended this loan (show
the new t-account).
d.
Suppose
that the required reserves were 20 percent. If this were the case, would the
bank be in a position to extend any additional loans? Explain.
Assets
|
Liabilities
|
Vault Cash $20,000
|
Checking deposits $200,000
|
Deposits at Fed $30,000
|
Net Worth $15,000
|
Securities $45,000
|
|
Loans $120,000
|
This
assignment is due by11:59 p.m. (ET) on Monday of Module/Week 5.
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