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money and banking 14

1.Unless otherwise noted, the following assumptions are made in all questions: the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public’s holdings of currency do not change.

Classify each of these transactions as an asset, a liability, or neither for each of the“players” in the money supply process—the federal reserve, banks, and depositors.

a. You get a $10,000 loan from the bank to buy an automobile.

b. You deposit $400 into your checking account at the local bank.

c. The Fed provides an emergency loan to a bank for $1,000,000.

d. A bank borrows $500,000 in overnight loans from another bank.

e. You use your debit card to purchase a meal at a restaurant for $100

For the graph questions, you can submit a photo of your hand-drawn work.

Q21. Why is it that a decrease in the discount rate does not normally lead to an increase inborrowed reserves? Use the supply and demand analysis of the market for reserves to explain.

Q22 Using the supply and demand analysis of the market for reserves, indicate what happens tothe federal funds rate, borrowed reserves, and nonborrowed reserves, holding everythingelse constant, under the following situations.

a. The economy is surprisingly strong, leading to an increase in the amount of checkabledeposits

b. Banks expect an unusually large increase in withdrawals from checking deposit accountsin the future

c. The Fed raises the target federal funds rate.

d. The Fed raises the interest rate on reserves above the current equilibrium federal fundsrate.

e. The Fed reduces reserve requirements.

f. The Fed reduces reserve requirements and then offsets this action by conducting an openmarket sale of securities.

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