1-

Bank A has the following balance sheet. Suppose the average duration of its assets is 3 years and the average duration of its liabilities is 5 years.

Assets Liabilities

Rate-sensitive $100 million Rate-sensitive $75 million

Fixed-rate 100 million Fixed-rate 125 million

If interest rates drop from 12% to 8%, what will happen to Bank As profits? What will happen to the net worth of Bank A? If you are the manager of Bank A, what can you do to keep the bank from being vulnerable to interest rate changes?

2- Suppose the required reserve ratio on checkable deposits is 8% and banks do not hold any excess reserves. If the Fed sells $10 million of bonds to Jane, who pays for the bonds with a check on her account at Bank A, what happens to reserves and the monetary base? Use T-accounts to explain.

3- Suppose the required reserve ratio is 8%, currency in circulation is $500 billion, checkable deposits are $1000 billion, and excess reserves are $20 billion.

a- Calculate the money multiplier, the currency deposit ratio, and the excess reserve ratio.

b- If the Fed sells $600 billion of bonds and the ratios in part a remain the same, what is the effect on the money supply?

4- What will happen if the Fed first conducts an open market purchase and then increases reserve requirements? Use a graph to explain.