1) Suppose that the total liabilities of a depository are checkable deposits equal to $2billion. It...

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1) Suppose that the total liabilities of a depository are checkable deposits equal to $2billion. It has $1.65 billion in loans and securities, and the required reserve ratio is 15percent.Does this institution hold any excess reserves?If so, how much? (3 points)2) The Federal Reserve purchases $1 million in US Treasury bonds from a bond dealerand the dealer’s bank credits the dealer’s account. The required reserve ratio is 15percent. The bank immediately lends its excess reserves. How much will the bank be ableto lend its customers after the Fed’s purchase, ceteris paribus? If banks are fully loanedup the introduction of the new $1 million will change the money supply by how much?(2 points).3) Suppose that each 0.1 percentage point decrease in the equilibrium interest rateinduces a $10 billion in real planned investment spending by businesses. In additional theinvestment spending multiplier is equal to 5. The money multiplier is equal to 4.Furthermore, every $20 billion increase in the money supply brings a 0.1 percentagepoint reduction in the equilibrium interest rate. Use this information to answer thefollowing questions, ceteris paribus.a) How much must real planned investment spending increase if the FederalReserve desires to bring about a $100 billion increase in equilibrium real GDP? (4 points)b) How much must the money supply change for the Fed to induce the change inreal planned investment calculated in part a? (3 points)c) What dollar amount of open market operations must the Fed undertake to bringabout the money supply change calculated in part b? (3 points)4) Consider the following data. Calculate M1 and M2.Demand deposits $625Saving deposits $400US Government securities (Bonds) $1200Small denomination time deposits $950Money market deposit accounts $850Money market mutual funds $400Large denomination time deposits $1900Travelers checks $025Currency $600
	
Document Preview: Macro Problem Set #7 Money and the Fed 
 
1) Suppose that the total liabilities of a depository are checkable deposits equal to $2 
billion. It has $1.65 billion in loans and securities, and the required reserve ratio is 15 
percent.  
 
Does this institution hold any excess reserves? 
If so, how much? (3 points)

2) The Federal Reserve purchases $1 million in US Treasury bonds from a bond dealer 
and the dealer’s bank credits the dealer’s account. The required reserve ratio is 15 
percent. The bank immediately lends its excess reserves. How much will the bank be able 
to lend its customers after the Fed’s purchase, ceteris paribus? If banks are fully loaned 
up the introduction of the new $1 million will change the money supply by how much?  
 (2 points). 
 
3) Suppose that each 0.1 percentage point decrease in the equilibrium interest rate 
induces a $10 billion in real planned investment spending by businesses. In additional the 
investment spending multiplier is equal to 5. The money multiplier is equal to 4. 
Furthermore, every $20 billion increase in the money supply brings a 0.1 percentage 
point reduction in the equilibrium interest rate. Use this information to answer the 
following questions, ceteris paribus. 
 
 a) How much must real planned investment spending increase if the Federal 
Reserve desires to bring about a $100 billion increase in equilibrium real GDP? (4 points) 
 
 b) How much must the money supply change for the Fed to induce the change in 
real planned investment calculated in part a? (3 points)  
 
 c) What dollar amount of open market operations must the Fed undertake to bring 
about the money supply change calculated in part b? (3 points)  
 
4) Consider the following data. Calculate M1 and M2. 
 
Demand deposits     $625 
Saving deposits     $400 
US Government securities (Bonds)   $1200 
Small denomination time deposits   $950 
Money market deposit accounts   $850 
Money market mutual funds    $400 
Large denomination time...

Robert · Accepted Answer

Q1
Required reserves will be 15% of all liabilities=.15*2 billion= 0.3 billion. Existing reserves are 2 -1.65 billion= 0.35 billion. So excess reserves = 0.35-0.3 =0.5 billion. This is because loans , securities and reserves add up to total liabilities and must equal 2 billion. 
Q2.
The dealer gets 1 billion in his account. This allows the bank to keep .15*1=0.15 billion as required reserves. The remaining amount = 0.85 billion can be used to give loans.
The amount og money supply that can be created due to these loans is given by the money multiplier= 1/ reserve ratio = 1/0.15 = 100/15
The money supply generated = (100/15)*.85 = 5.6666 billion
Q3.
 a.

1) Suppose that the total liabilities of a depository are checkable deposits equal to $2billion. It has $1.65 billion in loans and securities, and the required reserve ratio is 15percent.Does this...

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