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2. ('3 points) a. In the United States the required reserve ratio is 20%. Assume that the Federal Reserve buys $50 million in government securities
2. ('3 points) a. In the United States the required reserve ratio is 20%. Assume that the Federal Reserve buys $50 million in government securities on the open market. Calculate: i. Total change in reserves in the banking system [1} ii. The maximum possible change in the money supply {1) b. Should the $00 million purchase of bonds by the Fed (referred tn above} increase or decrease the money supply? Will it have an expansionaryr or contractionary impact on the economy? {2) c. Could this lead to ination or deflation? How will a bank with man}? fixed-rate loans feel about this unanticipated action by the Federal Reserve? Explain. [2] d. Still using the reserve requirement given in 2a). Superbank has demand deposits of $2 million, loans of $1 million. Draw a t-chart account of its holdings, including determining what its required and excess reserves are (2}. e. Assume that Superbank now purchases $100,000 worth of bonds from the Fed. What is Superbank's new level of excess reserves? (1)
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