[BU204M4] Assessment Template
This Assessment deals with money, the Federal Reserve System, and the effects of money growth on the rate of inflation. In this Assignment, assume you are hired as an assistant quantitative analyst at a bank and one of your duties is calculating reserves and loans based on the total deposits in the bank.
Given the scenarios provided below, complete the tables and explain the computation results. This Assignment requires a combination of short paragraph answers, computations, and completion of a XXXXXXXXXXword essay.
Section 1: Deposits, Reserves and Loans
This section deals with increase in money supply given two scenarios (see “a” and “b” below). In Westlandia, the public holds 50% of money one (M1) in the form of cu
ency, and the required reserve ratio is 20%.
a) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply.
(Hint: The first row shows that the bank must hold $100 in minimum reserves — 20% of the $500 deposit — against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in cu
ency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in Round 1.)
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as cu
ency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
$200.00
$200.00
2
$200.00
$40.00
$160.00
$160.00
$80.00
$80.00
3
$80.00
$16.00
$64.00
$64.00
$32.00
$32.00
4
$32
$6.40
$25.60
$25.60
$12.80
$12.80
5
$12.80
$2.56
$10.24
$10.24
$5.12
$5.12
6
$5.12
$1.02
$4.10
$4.10
$2.05
$2.05
7
$2.05
$.41
$1.64
$1.64
$.82
$.82
8
$.82
$.16
$.66
$.66
$.33
$.33
9
$.33
$.07
$.26
$.26
$.13
$.13
10
$.13
$.03
$.10
$.10
$.05
$.05
Totals
$833.25
$166.65
$666.60
$666.60
$333.30
$333.30
) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public does not hold any of the loans in cu
ency? (Hint: Complete the table below when none of the loan proceeds are held in cu
ency following the example for row 1.)
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as cu
ency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
0.00
$400.00
2
$400.00
$80.00
$320.00
$320.00
0.00
$320.00
3
$320.00
$64.00
$256.00
$256.00
0.00
$256.00
4
$256.00
$51.20
$204.80
$204.80
0.00
$204.80
5
$204.80
$40.96
$163.84
$163.84
0.00
$163.84
6
$163.84
$32.77
$131.07
$131.07
0.00
$131.07
7
$131.07
$26.21
$104.86
$104.86
0.00
$104.86
8
$104.86
$20.97
$83.89
$83.89
0.00
$83.89
9
$83.89
$16.78
$67.11
$67.11
0.00
$67.11
10
$67.11
$13.42
$53.69
$53.69
0.00
$53.69
Totals
$2,231.56
$446.31
$1,785.25
$1,785.25
0.00
$1,785.25
c) Calculate the Money Multiplier for question 1. a.) based on its computed change in money supply, and calculate the Money Multiplier for question 1. b.) based on its computed change in money supply. What does this imply about the relationship between the public’s desire for holding cu
ency and the money multiplier? Which scenario will contribute more to increase in money supply?
Less money will be deposited and held in reserve for the multiplier to multiply when the public hold’s it instead of depositing it. When there isn’t as much money held in the required reserves, the money multiplier does not create as much new supply. Scenario B, where the public is depositing all of the cu
ently versus holding any will increase the money supply more than Scenario A.
Section 2: The Federal Reserve Tools to Change Money Supply
Explain how each of the following situations changes quantity of money (money supply) in the economy.
a) The Federal Reserve System buys bonds-the Federal Reserve System increases money supply by buying bonds-an expansionary tool to increase money supply
) The Federal Reserve System auctions credit-similar to selling bonds but is auctioning to banks with the highest credit limit whom will pay the highest interest-also an expansionary tool to increase money supply.
c) The Federal Reserve System raises the discount rate-a method to decrease money supply by discouraging banks from bo
owing reserve funds by raising the discount rate.
d) The Federal Reserve System raises the reserve requirement-also to reduce money supply, raising the reserve requirement decreases the amount of money banks have available to loan out and decreases the money multiplier.
Section 3: Total Holdings of Banks and Balance Sheet
Assume that in a country the total holdings of banks were as follows:
Bank
Amount in million dollars
Required Reserve
$45
Excess Reserve
$15
Deposits
$750
Loans
$600
Treasury Bonds
$90
a) Show that the balance sheet balances if these are the only assets and liabilities.
Assets Liabilities
Required Reserves $45.00 Deposits $750.00
Excess Reserves $15.00
Loans $600.00
Treasury Bonds $90.00
Total $750.00 = Total $750.00
Reserve Ratio 6%
Excess Ration 2%
) Assuming that people hold no cu
ency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks do not change their holdings of Treasury bonds?
c) How much does the money supply change by?
Section 4: Monetary Policy Tools Application
Complete the following in XXXXXXXXXXword essay. As an assistant quantitative analyst for this bank, what can you assume from these results? What recommendations can you provide to your senior manager on loan rates, depending on the Federal Reserve System's ratio percentage? What should the bank do when the Fed raises the discount rate and the Federal Funds Rate? What should the bank do when the Fed increases and decreases the reserve ratio to change the reserve requirement?
[BU204M4] Assessment Template
This Assessment deals with money, the Federal Reserve System, and the effects of money growth on the rate of inflation. In this Assignment, assume you are hired as an assistant quantitative analyst at a bank and one of your duties is calculating reserves and loans based on the total deposits in the bank.
Given the scenarios provided below, complete the tables and explain the computation results. This Assignment requires a combination of short paragraph answers, computations, and completion of a XXXXXXXXXXword essay.
Section 1: Deposits, Reserves and Loans
This section deals with increase in money supply given two scenarios (see “a” and “b” below). In Westlandia, the public holds 50% of money one (M1) in the form of cu
ency, and the required reserve ratio is 20%.
a) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply.
(Hint: The first row shows that the bank must hold $100 in minimum reserves — 20% of the $500 deposit — against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in cu
ency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in Round 1.)
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as cu
ency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
$200.00
$200.00
2
$200.00
$40.00
$160.00
$160.00
$80.00
$80.00
3
$80.00
$16.00
$64.00
$64.00
$32.00
$32.00
4
$32
$6.40
$25.60
$25.60
$12.80
$12.80
5
$12.80
$2.56
$10.24
$10.24
$5.12
$5.12
6
$5.12
$1.02
$4.10
$4.10
$2.05
$2.05
7
$2.05
$.41
$1.64
$1.64
$.82
$.82
8
$.82
$.16
$.66
$.66
$.33
$.33
9
$.33
$.07
$.26
$.26
$.13
$.13
10
$.13
$.03
$.10
$.10
$.05
$.05
Totals
$833.25
$166.65
$666.60
$666.60
$333.30
$333.30
) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public does not hold any of the loans in cu
ency? (Hint: Complete the table below when none of the loan proceeds are held in cu
ency following the example for row 1.)
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as cu
ency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
0.00
$400.00
2
$400.00
$80.00
$320.00
$320.00
0.00
$320.00
3
$320.00
$64.00
$256.00
$256.00
0.00
$256.00
4
$256.00
$51.20
$204.80
$204.80
0.00
$204.80
5
$204.80
$40.96
$163.84
$163.84
0.00
$163.84
6
$163.84
$32.77
$131.07
$131.07
0.00
$131.07
7
$131.07
$26.21
$104.86
$104.86
0.00
$104.86
8
$104.86
$20.97
$83.89
$83.89
0.00
$83.89
9
$83.89
$16.78
$67.11
$67.11
0.00
$67.11
10
$67.11
$13.42
$53.69
$53.69
0.00
$53.69
Totals
$2,231.56
$446.31
$1,785.25
$1,785.25
0.00
$1,785.25
c) Calculate the Money Multiplier for question 1. a.) based on its computed change in money supply, and calculate the Money Multiplier for question 1. b.) based on its computed change in money supply. What does this imply about the relationship between the public’s desire for holding cu
ency and the money multiplier? Which scenario will contribute more to increase in money supply?
Less money will be deposited and held in reserve for the multiplier to multiply when the public hold’s it instead of depositing it. When there isn’t as much money held in the required reserves, the money multiplier does not create as much new supply. Scenario B, where the public is depositing all of the cu
ently versus holding any will increase the money supply more than Scenario A.
Section 2: The Federal Reserve Tools to Change Money Supply
Explain how each of the following situations changes quantity of money (money supply) in the economy.
a)