Question 1
1. Consider a bank that has the following balance sheet
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Assets
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Liabilities and Net Worth
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Reserves $100
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Demand deposits $1,000
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Loans $1,000
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Net worth 100
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A new customer opens a checking account and deposits $500 into it. For each of the following questions, assuming the required reserve ratio is 10 percent.
(A). After the new deposit, how much money can this bank lend?
(B). Assuming that the bank makes the largest loan possible, borrowers choose not to hold excess cash, and banks choose not to hold excess reserves, how many total new deposits can be created as a result of the initial $500 deposit?
Question 2
If the demand deposit reserve requirement is 10%, banks hold no excess reserves, the public holds no additional currency, and the Federal Reserve purchases $10 million of U.S. Treasury bills from the public, what will be the ultimate impact on the money supply?
Question 3
Consider the equation of exchange with a fixed velocity and real GDP that grows 2% per year. Each year the central bank increases the quantity of money by 3%. If the equilibrium real interest rate is 6%, what is the equilibrium nominal interest rate?
Question 4
Consider a simple economy in which investment is constant and equal to $100 billion. There is no government or foreign sector, and the price level is constant. Consumption is
C = $40 billion + 0.75Y.
a. What is the value of the marginal propensity to consume?
b. What is consumption at an output of $1,000 billion?
c. What is the equilibrium GDP in this model?
d. What is the value of the multiplier?
e. What happens to equilibrium GDP should investment demand fall to $80 billion?