1 Suppose banks become worried that households may suddenly withdraw a lot of their deposits and further assume that the Fed does not respond. Using a graph, show the impact of this change in the market for bank reserves and on the nominal (Federal Funds) interest rate.

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2 If both real and nominal interest rates rise (by roughly the same amount), what must be true about inflation? Explain briefly using the Fisher equation.

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3 Suppose a bank that is exactly meeting its reserve requirement experiences a sudden withdrawal of deposits. What happens to the bank's balance sheet? What must the bank do to satisfy the reserve requirement?

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4.Imagine that the chair of the Federal Reserve announced that, as of Monday morning, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000; and so forth. Furthermore, the balances in all checking and savings accounts would be multiplied by 10. So, for example, if Mr X had $500 in his checking account, as of Monday morning his balance would be $5,000. Is Mr X actually be 10 times better off on Monday? Why or why not?

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