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4. The combined balance sheet of all the commercial banks in the economy is as follows: Assets Total Reserves $50 b Liabilities Deposits $250

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4. The combined balance sheet of all the commercial banks in the economy is as follows: Assets Total Reserves $50 b Liabilities Deposits $250 b Required Reserves $50 b Excess Reserves $0 Government Securities $75b Loans $150 b a. What is the reserve requirement? b. The economy in a recession, so the Fed will engage in [expansionary/contractionary] monetary policy to [increase/decrease] AD and (sell/buy] $20 billion worth of bonds from the banks. What will excess reserves be after this transaction? c. By how much would the money supply increase if the banks fully utilized their lending capacity and all money lent was redeposited into the banking system? 5. Suppose the Fed decided to sell $60 billion worth of government securities on the open market. a. If the reserve ratio is 5%, what is the maximum potential change in the money supply? Will the money supply increase or decrease? b. What will this sale by the Fed do to interest rates? Why? c. Under what circumstances would the Fed be pursuing such an open market policy? 6. To obtain the same objectives in #5, should the Fed increase or decrease a. the discount rate? b. the reserve requirement?

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