Question
1. Classify each of these transactions as an asset, a liability, or neither for each of the players in the money supply process - the
1. Classify each of these transactions as an asset, a liability, or neither for each of the "players" in the money supply process - the Federal Reserve, the banking system, and nonbank public. (2 points)
a) You deposit $400 into your checking account at the First National Bank of Huntsville
b) The Fed provides an emergency loan to a bank for $ 1 million
c) A bank borrows $500,000 in overnight loans from another bank
d) Bank of America buys $10 billion in treasury securities from the Fed
2. We know that M = m (C + DL +NBR) where M is the money supply, m is the money multiplier, C is the currency in circulation, DL is the discount loan, and NBR is the non- borrowed reserves. Briefly state which component of this equation would be affected by each of the following monetary policy actions. Will the effect on the specific component be an increase or a decrease? What will be the effect on money supply (M)? (2 points)
a) An open market sale
b) An increase in the interest rate on reserves
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