Economics 347                                                                                                                             Worksheet #2




1.  Suppose the Fed decides to decrease reserves in the banking system by $1 million through open market operations.


a.  Explain what open market operations are and how the Fed uses them to decrease bank reserves.

b.  Immediately after a change in reserves and before any other actions by the Fed, banks or households, explain how the money supply has changed.

c.  Explain how the change in reserves eventually leads to a change in the money supply through the multiple deposit creation process.

d.  Explain how we can determine what the magnitude of the final change in the money supply will be. What economic variables do we have to know before we can make such a determination?


 2.  Given the following values:


        RR = $50 billion C = $200 billion C/D = .25 ER/D = .05


    a.  What is the value of all deposits in the economy?

    b.  What is the value of total reserves in the economy?

    c.  What is the value of the monetary base in the economy?

    d.  What is the value of the money multiplier in the economy?

    e.  What is the value of the money supply in the economy?



3.  For each of the following factors explain how that factor changes the monetary base, the money multiplier and the money supply in the economy.


a.  The Fed issues a new discount loan to Bank of Carlisle.

b.  Banks decide to hold additional excess reserves at Christmastime to prepare for deposit outflows.

c.  The Fed buys 6-month Treasury Bills for its portfolio.

d.  The Fed decreases the required reserve ratio on large demand deposits from 10 to 7 percent.

e.  ABC news reports that banks in a number of states may have to close their doors for a few days. Apparently, the hurricanes and other natural disasters have led to such a demand on bank deposits that they are not able to keep up.

f.  Banks introduce a new type of account that pays higher interest rates than checking accounts, allows you to write unlimited checks, is insured, but is not counted as part of M1.

g. The Fed decides to pay interest on excess reserves that banks have on account with the Fed.