Assignment 2 Macro

1. For each of the following, say whether it is an asset on the accounting books of a bank or a liability. Explain why in each case. (15 points)
   1. Cash in the vault

   2. Demand deposits

   3. Savings deposits

   4. Loans

   5. Deposits at the Federal Reserve

1. You are given this account for a bank: (20 points) (please show work to receive credit)

ASSETS LIABILITIES

Reserves $500 $3,500 Deposits

Loans 3,000

The required reserve ratio is 10 percent.

1. How much is the bank required to hold as reserves, given its deposits of $3,500?

2. How much are its excess reserves?

3. By how much can the bank increase its loans?

4. What will happen to the bank accounts if a depositor withdraws a sum of cash from the bank? Your answer should address “deposits, reserves, loans” etc.

1. Select the correct graph below that illustrates each of the following situations (in the graphs, M subscript d or s equals money demand or supply respectively; r = interest rates): (20 points)
2. State whether you agree OR disagree with the following statements and explain why. (15 points) (Your answer must contain a min or 100 words)
3. This question will require some outside research. This past summer the United Kingdom (Britain) voted to leave the European Union. What impact did the decision have on the exchange rate between the pound and the dollar? Why? What action did the United Kingdom central bank (the equivalent of our Fed) take in response? (30 points)

1. The Fed buys bonds in the open market during a recession.

2. During a period of rapid inflation, the Fed increases the reserve requirement.

3. The Fed acts to hold interest rates constant during a period of high inflation.

4. During a period of no growth in GDP and zero inflation, the Fed lowers the discount rate.

5. During a period of rapid real growth of GDP, the Fed acts to increase the reserve requirement.

   1. 2.

   3. 4.

   5.

1. When the real economy expands, the demand for money expands. As a result, households hold more cash and the supply of money expands.

2. If the Fed buys bonds in the open market and at the same time we experience a recession, interest rates will no doubt rise.

(Your answer must contain a min of 200 words)