When describing how banks create mony, answer the following question:
1) Show how each of the following would initially affect a bank’s assets and liabilities.
- Someone makes a $10,000 deposit into a checking account.
- A bank makes a loan of $1,000 by establishing a checking account for $1,000
- The loan described above is spent.
- A bank must write off a loan because the borrower defaults.
When summarizing the Fed’s tools of monetary policy, answer the following question:
2) What tools does the Fed have to pursue monetary policy? Which tool does it use the most?
3) Suppose the money supply is currently $400 billion and the Fed wishes to increase it by $100 billion.
- Given a required reserve ration of 0.25, what should it do?
- If it decided to change the money supply by changing the required reserve ratio, what change should it make? Why may the Fed be reluctant to change the reserve requirement
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