Assignment
This assignment addresses how banks “create” money through making loans and how the change in the money supply is calculated, as well as how to calculate the money multiplier. In addition, this assignment examines the tools the Federal Reserve System uses to influence the money supply.
1. In the hypothetical country of Westlandia, banks are required to hold 20% of checkable deposits as reserves. The public holds 50% of the loans as currency in circulation and redeposits the remaining 50% percent of the loans.
a. Complete the table (calculations should be to no more than two decimal places).
Round Deposits Required Reserves of 20% Excess Reserves New Loans 50% of loan proceeds are held as currency in circulation by people Loan proceeds redeposited
1 $500 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
2 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
3 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
4 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
5 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
6 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
7 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
8 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
9 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
10 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
Totals (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
b. Calculate the new money supply.
(Enter your response here.)
c. Calculate the money multiplier.
(Enter your response here.)
2. In the hypothetical country of Middlelandia, banks are required to hold 20% of checkable deposits as reserves. Also, the public holds none of the loans as currency in circulation and redeposits all the loans.
a. Complete the table (calculations should be to no more than two decimal places).
Round Deposits Required Reserves of 20% Excess Reserves New Loans None of loan proceeds are held as currency in circulation by people Loan proceeds redeposited
1 $500 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
2 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
3 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
4 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
5 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
6 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
7 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
8 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
9 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
10 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
Totals (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
b. Calculate the new money supply.
(Enter your response here.)
c. Calculate the money multiplier.
(Enter your response here.)
3. In the hypothetical country of Eastlandia, banks are required to hold 10% of checkable deposits as reserves. Also, the public holds none of the loans as currency in circulation and redeposits all the loans.
a. Complete the table (calculations should be to no more than two decimal places).
Round Deposits Required Reserves of 10% Excess Reserves New Loans None of loan proceeds are held as currency in circulation by people Loan proceeds redeposited
1 $500 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
2 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
3 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
4 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
5 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
6 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
7 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
8 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
9 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
10 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
Totals (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
b. Calculate the new money supply.
(Enter your response here.)
c. Calculate the money multiplier.
(Enter your response here.)
4. Describe in detail the differences between the three hypothetical countries’ money supplies, money multipliers, and likely impacts on each economy.
(Enter your response here.)
5. Explain how each of the following situations changes the quantity of money (money supply) in the economy, based on its computed change in money supply.
a. The Federal Reserve System buys bonds.
(Enter your response here.)
b. The Federal Reserve System auctions credit.
(Enter your response here.)
c. The Federal Reserve System raises the discount rate.
(Enter your response here.)
d. The Federal Reserve System raises the reserve requirement.
(Enter your response here.)
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References:
Author. (Date.) Title. Source.
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