Assignment:
Initially, money is created by Fed by printing bills and coins. But, in an economy there is much more money than the currency in calculation.
If the reserve requirement is 20% and the bank loans out all deposits minus required reserve, a $100 deposit will create $5000. How is it possible? Please see the following table:
|
|
Bank Gets
|
Bank Keeps
(Reserve Ratio: 20%)
|
Bank Loans (80%) = Person Borrows
|
|
Initial deposit
|
10,000
|
2,000
|
8,000
|
|
Second stage
|
8,000
|
1,600
|
6,400
|
|
Third stage
|
6,400
|
1,280
|
5,120
|
|
Fourth stage
|
5,120
|
1,024
|
4,096
|
|
Fifth stage
|
4,096
|
819
|
3,277
|
|
Sixth stage
|
3,277
|
656
|
2,621
|
|
Seventh stage
|
2,621
|
524
|
2,097
|
|
All other stages
|
10,486
|
2,097
|
8,389
|
|
TOTAL
|
50,000
|
10,000
|
40,000
|
1. Which of the tools of monetary policy did the Fed use in the emergency?
2. Why did the grounding of aircraft cause the Fed to act?
3. The chapter lists the duties the Fed must perform. Which duties are mentioned in the article?
4. What forms did liquidity take?
5. Do you think the Fed acted correctly?
What are the three stages of a financial crisis? Briefly explain how each stage played out differently during the Great Depression and the Crisis of 2008.