1.(25) Consider the balance sheet below for Gold Rush Bank, NA. (a/k/a GRB) Asse
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Question
1.(25) Consider the balance sheet below for Gold Rush Bank, NA. (a/k/a GRB)
Assets
Liabilities
Reserves = $135,000.00
Demand Deposits = $270,000.00
Loans = $45,000.00
Loans from FED = $30,000.00
Securities = $65,000.00
Cash = $55,000.00
If the required reserve ratio = 0.175 and the portion of M1 kept as currency = 0.625, then answer the following:
a.How much does GRB have in required reserves (RR)? How much money does GRB have in excess reserves (ER)? (Calculate both to the nearest penny)
b.Calculate the potential money multiplier (m). If it produces an infinitely repeating/non-repeating decimal, then round to three decimal places. How much potential new money (M) can be created by GRB if they loan out all of their excess reserves? (Calculate this to the nearest penny)
c.Calculate the ACTUAL Money Multiplier (m) and ACTUAL (M) Money Created (Calculate this to the nearest penny)
All currency values stated with $ on left, 2 decimal places. For multipliers, please round to nearest 3rd decimal place if long repeating/nonrepeating decimal or use a fully reduced improper fraction.
2.(25) Consider the situation the economy is facing:
Events of the Past 18 Months:
Total spending has been increasing and has shown no signs of stopping.
Production levels have risen up to full employment/full production levels and have apparently reached capacity.
Unemployment is at a yearlong low.
Price levels have been rising like crazy and have shown no signs of stopping.
Many Economists are saying that the rate of inflation may hit 8% before the year is over with.
Leading Indicator Data
During the past four months, the price of gold seems to have risen quite a bit,
The Dow Jones Industrial Average has passed 17,000 after rising for the past 30 days.
New housing starts and orders for new durable goods seem to have leveled off after large increases during the past year.
Many pundits are saying that consumers, and some investors, are becoming worried about a serious problem with inflation.
Interest rates are high and are very responsive to changes in the M1 money supply.
Construct AD/AS and M1/MD diagrams, which fit the scenario described above. Recommend Monetary Policy that would help remedy the situation (if circumstances would allow monetary policy to be effective.) Be sure to talk about which mode of Monetary Policy would be used, which tools would be used and how they would affect M1, interest rates (i) id & iff (if applicable), ip (if applicable), Total Spending, Price Levels and/or Real National Output. Be sure to show these effects on the two diagrams—AD/AS for before and after, M1/MD for effects of Monetary policy on M1 and i!
(25) WRITE THE FOLLOWING AS AN ESSAY OF AT LEAST 800 WORDS AND INCLUDE MACROECONOMIC GRAPHS WHERE APPROPRIATE. Monetary Policy has many advantages over Fiscal Policy. However, there are situations in which Monetary Policy is ineffective to help the economy. Discuss in some detail the advantages Monetary Policy has over Fiscal Policy. Explain what circumstances might render Monetary Policy ineffective. Additionally, discuss what products offered and what changes made in Financial Markets have increased the relative liquidity of some normally illiquid assets, and how they make it more difficult for the FED to track the M1 money supply and administer monetary policy.
4.(25) Consider the Cumulated Balance Sheets for the Federal Reserve System and the Commercial Banking System. All figures are in billions of US dollars.
Federal Reserve System
Commercial Banking System
Assets
Liabilities
Assets
Liabilities
Securities = $150 billion
Reserves of CBS
= $100 billion
Reserves = $100 billion
Demand Deposits
= $175 billion
Loans to CBS
= $75 billion
Treasury Deposits
= $40 billion
Loans = $58 billion
Loans from the FED
= $75 billion
Currency in Circulation
= $85 billion
Securities = $45 billion
Currency = $47 billion
Show the effect of the following transactions on balance sheets of the FED and the Commercial Banking System. Show how each transaction causes the money supply (M1) to change. Do not cumulate your answers. Use a table like the one used for the in-class problem similar to this one.
T1. Commercial Banks pay off $11 billion in loans from the FED.
T2. The FED buys $9 billion in securities from the Public; the FED will send government checks to pay the Public.
T3. Customers of Commercial Banks borrow an additional $5 billion in personal and commercial loans.
T4. The FED sells $8 billion in securities to Commercial Banks.
T5. Commercial banks send $7 billion worth of currency to the FED.
Assets
Liabilities
Reserves = $135,000.00
Demand Deposits = $270,000.00
Loans = $45,000.00
Loans from FED = $30,000.00
Securities = $65,000.00
Cash = $55,000.00
Explanation / Answer
1.(25) Consider the balance sheet below for Gold Rush Bank, NA. (a/k/a GRB) Asse
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