1. In each of the following situations, explain what happens to the money supply and interest rate. (1 point each)
a. The Fed sells government securities on the open market.
b. The Fed buys government securities on the open market.
c. Increased discount rate.
d. Decreased discount rate.
e. Increased reserve requirement.
2. Draw a correctly labeled graph of the money market for each of the following scenarios. (3 points for each correctly drawn and labeled graph – 2 points for the graph and 1 point for the correct shift)
a. The aggregate price level increases
b. Real GDP falls
c. There is a dramatic increase in online banking.
3. The following tables represent the consolidated balance sheets of all commercial banks and the 12 Federal Reserve banks. Complete columns 1-3 based on the following scenarios. Each scenario is independent of the others so do not track the changes through each of the columns. (2 points for each scenario) Assets: A B C Reserves 33 Securities 60 Loans 60 Liabilities and net worth: Checkable deposits 150 Loans from Federal Reserve 3 Commercial banks Assets: A B C Securities 60 Loans to commercial banks 3 Liabilities and net worth: Reserves of commercial banks 33 Treasury deposits 3 Federal Reserve Notes 27 Federal Reserve Banks
a. A decline in the discount rate prompts commercial banks to borrow an additional $1 billion from the Federal Reserve Banks. Show the new balance-sheet figures in column A.
b. The Federal Reserve Banks sell $3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet figures in column B.
c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet figures in column C.
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