1. Suppose that a lottery winner deposits $5 million in cash into her transactions account at the Bank of America.Assume a reserve requirement of 20 percent and no excess reserves in the banking system prior to this deposit.Show the changes on the Bank of America balance sheet when the $5 million is initially deposited.

BANK OF AMERICA

Assets.

Change in required reserves ______million.

Change in excess reserves _______million

Change in total reserves_______million

Liabilities

Change in deposits _______million

2. In December 1994, a man in Ohio decided to deposit all of the 8 million pennies he had been saving for nearly 65 years. (His deposit weighed over 48,000 pounds!) With a reserve requirement of 16 percent, how did his deposit change the lending capacity of a. his bank? _______ b. the banking system? ________

3. China Cuts Reserve Requirements

BEIJINGFor the third time this year China's central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world's second-largest economy.

The People's Bank of China's half percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 15.5 percent. The move frees up about US $108 billion in additional funds that banks can now lend.

What was the money multiplier in China

Instructions: Round response to two decimal places.

a. before the change in reserve requirements?

b. after the change in reserve requirements?

4. China Cuts Reserve Requirements

BEIJINGFor the third time this year China's central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world's second-largest economy.

The People's Bank of China's half percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 15.5 percent. The move frees up about US $108 billion in additional funds that banks can now lend.

According to the News Wire,

Instructions: Round responses to one decimal place.

a. by how much did excess reserves in China increase?____billion

b. by how much did the lending capacity of Chinese banks increase as a result? ______ billion

5. Fed Cuts Key Interest Rate Eighth Time in Year

Washington, DCAlarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. This is the eighth time this year the Fed had cut the discount rate, dropping it from 4.75 percent at the beginning of the year to a mere 0.50 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession.

If every one-point change in the federal funds rate alters aggregate demand by $200 billion, how far did AD shift in response to the interest rate cuts?

AD shifted to the (left or right) by _______ billion.