Exercises

Ozlem
Dursun-de Neef
Aarhus University

Exercises

Money and Banking

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Using supply and demand analysis for bonds, show how interest rates
are affected if inflation is expected to increase in the future. Plot the
supply and demand curve for bonds.
The Fed can perfectly control the amount of reserves in the system.
Is this statement true or false? Explain your answer.
The First National Bank receives an extra $100 of reserves but
decides not to lend out any of these reserves. How much deposit
creation takes place for the entire banking system?
If the Fed sells $1 million of bonds and banks reduce their borrowings
from the Fed by $1 million, predict what will happen to the money
supply.
An increase in the interest rate paid on excess reserves will always
cause an increase in the federal funds rate. Is this statement true or
false? Explain your answer.
Explain the Feds three tools of monetary policy and how each is used
to change the money supply. Does each tool affect the monetary base
or the money multiplier?
Exercises

Money and Banking

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10

11

Using the supply and demand analysis of the market for reserves,
indicate what happens to the federal funds rate, borrowed reserves
and nonborrowed reserves when there is an increase in the amount of
checkable deposits.
Suppose the current administration decides to decrease government
expenditures as a means to cut the existing government budget
deficit. Using a graph of aggregate demand and supply, show what
the effect would be in the short run. Describe the effects on inflation
and output.
Explain the complete formula for the M1 money supply, and explain
how changes in required reserves, excess reserves, the currency ratio,
the nonborrowed base, and borrowed reserves affect the money supply.
If the Fed injects reserves into the banking system and they are held
as excess reserves, what happens to the monetary base and money
supply?
The Fed buys $100 million of bonds from the public and also lowers
the required reserve ratio. What will happen to the money supply?
Exercises

Money and Banking

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12

What happens to the monetary base if people, fearing a bank run,

convert their checking deposits into currency holdings?

13

The required reserve rate set by the Fed is ten percent of all
checkable deposits. A bank sells 1 million of U.S. Treasury securities
it owns to the Fed. Describe what this transaction does to the banks
total reserves, its required reserves and its excess reserves.

14

What is the difference between a bank that is insolvent and one that
is illiquid?

15

Explain why a bank with a high debt-to-equity ratio may be more

profitable than a bank with a lower ratio but would also have a higher
level of risk.

16

Using supply and demand analysis for bonds, show how interest rates
are affected if the Federal government deficit increases. Plot the
supply and demand curve for bonds.

Exercises

Money and Banking

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