Problem Set 4
Complete all questions listed below. Clearly label your answers.
1. What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills are not? If the financial asset can be turned into real money fast.
Intrest earning checkable deposits are included because they can be converted quickly into paper money. Intrest earning savings accounts and treasury bills may have a time limit and are not so easily converted. 2. Why are banks able to maintain reserves that are only a fraction of the demand and savings deposits of their customers? Is your money safe in a bank? Why or why not? Because unlike checking accounts, savings accounts are not as easily accessable. The money typicaly stays in the savings account. Yes, the money in the account is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) 3. What is the Federal Funds Interest rate? if the Fed wants to use open market operations to lower the federal funds rate, what action should it take? The Federal Funds Interest Rate is the interest reat the depository institutions trade balances with each other. An overnight repurchase agreement
Suppose that the reserve requirement is 10 percent and the balance sheet of the People's National Bank looks like the accompanying example.
a. What are the required reserves of People's National Bank? Does the bank have any excess reserves? $20,000
b. What is the maximum loan that the bank could extend?
c. Indicate how the bank's balance sheet would be altered if it extended this loan (show the new t-account). Deposits at Fed $0 Loans $150,000
d. Suppose that the required reserves were 20 percent. If this were the case, would the bank be in a position to extend any additional loans? Explain. The required reserve would then be $40,000 making excess reserves $10,000. The bank...
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