Download Econ2012: Principles of Macroeconomics

Econ2012: Principles of Macroeconomics
Problem Set # 10: Financial Markets
Name____________________________
Class ____________________________
1. Indicate whether the following are an asset (A) or a liability (L) to a commercial bank:
Government bond
_______
Federal reserve notes (dollar bills)
_______
Checking account
_______
Bank customer's loan
_______
Savings account
_______
2. Define Liquidity. Arrange the following from most liquid to least liquid. Explain.
M2
3.
M1
L
Bank A
Cash 2,000
Demand Deposits $20,000
Loans 16,000
Federal Reserve Account $2,000
If the reserve ratio is 15%, explain this bank’s position. What action(s) might this bank take.
4. If the reserve ratio is 20%, (and c = 0) explain what happens for 5 rounds of deposits and lending
when $100 enters the system. Then calculate the simple multiplier and explain what it means.
5. If the r = .10 and c = .2, calculate the total effect of a 5 million dollar increase in reserves.
a. using the simple money multiplier.
b. using the “approximate real world” money multiplier.
6. If the economy were in a recession, what action might the FED take? Be specific, and explain how
private banks would react to the FED’s action.