1. The customers of First Bank have a total of $520 million deposited there. Fir
ID: 1153731 • Letter: 1
Question
1. The customers of First Bank have a total of $520 million deposited there. First Bank has $450 million in loans, $30 million cash in its vault, and $40 million on deposit with the central bank. a. Draw the T-account for First Bank (showing assets and liabilities) b. Suppose the required reserve ratio is 12%. What are this bank's excess reserves? What should it do? c. Suppose depositors put $15 million into their bank accounts. What is the maximum amount of money can be created? 2. Suppose the central bank engages in the open market purchase of government bonds a. Explain the effects in a supply and demand diagram for money. Please put the quantity of money on the x-axis and the nominal interest rate on the y-axis. b. What will be the effect of this action on real GDP? Show the effects in an AD-AS diagram What will be the effect on unemployment? Is this expansionary or contractionary monetary policy? 3. During the Great Depression, the US government instituted a program called the New Deal that involved, among other things, massive expenditures on public infrastructure such as roads and hydroelectric dams. What kind of economic policy was this and what was it intended to accomplish? Show the intended effect of this policy in a new AD-AS diagramExplanation / Answer
(1)
(a)
(b)
Required reserves ($ Million) = Deposits x Required reserve ratio = 520 x 12% = 62.4
Excess reserves ($ Million) = Total reserves - Required reserves = (40 + 30) - 62.4 = 70 - 62.4 = 7.60
The bank can lend out an additional $7.60 of excess reserves as loan.
(c)
Maximum amount of new money ($ Million) = New deposits / Required reserves ratio = 15 / 0.12 = 125
NOTE: As per Chegg Answering Policy, 1st question is answered.
ASSETS $ Million LIABILITIES AND EQUITY $ Million Cash in vault 30 Deposits 520 Deposit with Central bank 40 Loan 450 TOTAL 520 TOTAL 520Related Questions
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