Monetary Policy and Aggregate Demand Curve

Pages: 3 (1112 words) Published: December 12, 2010
1.  when you multiply Large-denomination time deposits \$ 304 billion times 947 billion you get a total of 292623 billion for M1, Small-denomination time deposits    198 billion + 292623= 292929 billion=326 billion=293275 billion for the grand total of M2 2.  If 0.25 represents 25% and the reserve means how much cash has to stay in the bank, then 25% of 4,000 is 1,000. That leaves 3,000 for a loan. The "excess" is the amount over the "required reserve", 3,000 is 2,000 over the 1,000 required reserve. 2,000 is a 50% excess of the "required reserve" of the 4,000 \$ deposit. 3. The formula for the money multiplier is:

M=1/R,..... M(money multiplier)=1/r(reserve ration) The money multipliers for required reserve ratios of 0.15 and 0.20  If r is .10, then m is 10 (1/.10=10).
If r is .05, then m is 20 (1/.05=20).
If r is .15, then m is 6.6 (1/.15=6.6), ...If r is .20, then m is 5 (1/.20=5). 4.A.Someone makes a \$10,000 deposit into a checking account, THIS WILL DEFINITELY INCREASE THE BANKS ASSETS BECAUSE THIS 10,000 WILL BE AN INVESTEMENT INTO THE BANK, AND MONEY THAT THE BANK CAN USE TO ITS ADVANTAGE. THE LIABILITIES WILL NOT BE AFFECTED. B.A bank makes a loan of \$1,000 by establishing a checking account for \$1,000. THIS WILL INCREASE ITS LIABILITIES BECAUSE THE BANK IS LENDING MONEY, BUT IT WILL ALSO INCREASE THE BANKS ASSETS BECAUSE THEY HAVE ESTABLISHED A CHECKING ACCOUNT FOR 1,000\$ C.The loan described in part (b) is spent. I THIS SITUATION THAT LIABILITIES HAVE INCREASED BECAUSE THE LOAN HAS BEEN SPENT, THE ASSETS ARE NOT AFFECTED D. A bank must write off a loan because the borrower defaults. THE BANK HAS NOW TAKEN A LOSS ON ITS LIABILITIES WHICH IS DECREASED WHEN IT IS WRITEN OFF, THE ASSETS ARE ALSO DECREASED BECAUSE THE BANK SPENTS ITS OWN MONEY TO COVER ITS LOSS. 5.a. The Fed purchases \$10 million worth of U.S. government bonds from a bank. AT THIS POINT THE BANKS ASSET HAVE SHOT UP BECAUSE THEY HAVE JUST SOLD 10 MILLION WORTH OF US GOVERMENT BOND WHICH...