1. Suppose Grob's Bank had the following balance sheet:

Assets Liabilities

Cash Assets (Reserves) 4500 Demand Deposits

Loans 14000 You 4000

Securities 11500 Others 26000

Total 30000 Total 30000

Suppose further that the required reserve ratio is 0.15

1) Is the bank holding more or less than its required reserves?

2) Suppose the Fed engages in contractionary monetary policy by trading a $2000 bond, would the Fed buy or sell the bond?

3) What is the initial effect on the bank's balance sheet if the bond is traded with youa depositor at Grob's bank?

4) What will be the total change in the money supply?

5) Explain how the Fed's policy effects: (i) interest rates, (ii) investment, (iii) consumption, and (iv) equilibrium aggregate demand.