22 Jul WHAT HAPPENS TO THE FEDERAL FUNDS RATE?
a. Record the fol Show more Suppose no one holds currency so c =0 and the reserve to deposit ratio ? = 0.20. a. Record the following events on the balance sheets below: Event 1: The Fed purchases $10000 from Jack a government securities dealer. The Fed pays for the purchase by giving Jack a check for $10000. Jack deposits the check in Bank A. The check clears. (Indicate the changes on the balances sheet below labeling your entries with the number 1 for event 1.) Event 2: Bank A makes a loan of (you do the calculation) $___________ to Lisa in the form of a cashiers check. Lisa gives the check to Joan in exchange for a car. Joan deposits the check in Bank B. The check clears. (Indicate the changes on the balances sheet below labeling your entries with the number 1 for event 1. Bank A The Fed Assets Liabilities Assets Liabilities R Loans D Gov bonds R Bank B Assets Liabilities R D b. What happens to bank reserves at the end of event 1? What happens to the Federal funds rate? Explain fully by drawing the supply and demand graph for the market for bank reserves. c. How much has the money supply changed by at the end of event 1? much has the money supply changed by at the end of event 2? d. If I asked you to do an event 3 how much would Bank B lend out? e. Use the money supply equation to calculate exactly how the money supply will change by. Show your work! f. Draw the money supply and money curves and show what happens when the money supply increases. Using this portfolio balance approach (i.e. in equilibrium money supply = money demand) use a flow diagram to explain why an increase in the money supply results in lower interest rates. Show less
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