3 PS 2

Topics: Monetary policy, Central bank, Federal Reserve System Pages: 2 (399 words) Published: December 3, 2014
MGMT E-2000
Fall, 2014

Problem Set 2
(Due Tuesday, Oct. 7)
(100 pts.)

1.(15 pts.)

Suppose the Fed wants to raise the nominal interest rate. Explain the three available mechanisms the Fed can use to achieve this goal. In your answer, use a graph of the money market to show how the Fed’s action translates into a higher nominal interest rate. Ans:1. Fed

2. (10 pts.)

a.(6 pts.)

Explain the difference between the three Fed discount window programs.

b.(4 pts.)

Why does the Fed set the discount rate above the Fed Funds rate?

3.(25 pts.)

Suppose the Fed decides to sell $14 billion in Treasury bonds. Assume that the reserve requirement is 8%, banks hold 4% in excess reserves, but the public holds no cash.

What is the total increase or decrease in the money supply which would result from the Fed’s action? Explain your answer, and show your calculations.

4.(50 pts.)

Assume the public in the small country of Harvardia does not hold any cash. Commercial banks, however, hold 5% of their checking deposits as excess reserves, regardless of the interest rate.

a.(5 pts.)

Consider the balance sheet of one of several identical banks:

ASSETS
LIABILITIES & NET WORTH
Reserves $ 400
Checking Deposits $2,000
Loans $1,600
Net Worth $ 0

What is the required reserve ratio?

b.(10 pts.)

If the total money stock (supply) is $100,000, find the total amount of reserves held in the banking system. Show your work. Use a diagram to show what the money supply curve looks like for this economy, fully labeled.

c.(10 pts.)

The Harvardia Central Bank decides that it wants to cut the money stock in half. It is considering an open market operation. How many dollars worth of bonds should the Central Bank buy or sell? Assume that excess reserves are 5%...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • ACC 421 Week 2 Individual Assignments Essay
  • Essay about Excel Scenario Week 3 CIS 211
  • Business Admin Level 2 Research Paper
  • TASK 3 Essay
  • 101 2015 3 B Essay
  • Essay about Lesson 2 It Works The Development of Georgia as a Royal Colony
  • BA 2101 Career Industry Awareness Assignment 2013 2 Revised August 2013 1 Essay
  • unit 2 assignment childcare level 3 Essay

Become a StudyMode Member

Sign Up - It's Free