ECON 330 Homework 2

ECON330 Homework 2

1. Assume that RRR=10% and the following transactions happens in the given order:

i. Central Bank buys T-bonds from Bank A in the value of $5000.

ii. Bank A lends $4000 to Jim.

iii. Jim deposits $3000 in Bank B.

iv. Bank B lends $2000 to Sherry.

v. Sherry deposits $1500 to Bank C and Bank C keeps all proceedings in the reserves.

a. Calculate the change in required reserves in the banking sector as a result of actions i-v.

b. Calculate the change in excess reserves in the banking sector as a result of actions i-v.

c. Calculate the change in deposits in the banking sector as a result of actions i-v.

d. Calculate the change in cash in circulation as a result of actions i-v.

e. Calculate the change in monetary base as a result of actions i-v.

f. Calculate the change in money supply (M1) as a result of actions i-v.

2. If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves (required + excess), then what is the maximum deposit outflow it can sustain without altering its balance?

3. Your bank has the following balance sheet:

Assets Liabilities

Rate-sensitive $100 million Rate-sensitive $75 million

Fixed-rate 100 million Fixed-rate 125 million

What would happen to bank profits if the interest rates in the economy go down?

How much is expected to lose/earn if interest rates in the market go down by 3%?

Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?

4. State whether the following statement is true or false AND explain why: “A decrease in the discount rate will always cause a decrease in the federal reserve funds rate.”

Here’s the SOLUTION

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