5 Banking and financial market questions with some sub questions.

Question 1) The following are balance sheet items for two entities: the Central Bank and A Commercial Bank. Central Bank: Discount Loans $35 B, Currency $60 B, Government Securities $55 B, Net Worth: $10 B, and Reserves $20 B Commercial Bank: Checkable Deposits $100 B, Government Securities $80 B, Loans $50 B, Net Worth $15 B, Reserves $20 B, Borrowings (from Central Bank) $35 B The reserve requirement is 10%. In answering below, be sure to clearly state any assumptions you make. a) Build a Balance Sheet for each bank. If the Central Bank calls in $10 B in discount loans, explain in words what happens to each balance sheet initially. b) Calculate the effect of the Central Bank calling in $10 B in discount loans on the money supply. 0) Discuss 1 additional factor that affects the money supply (Ml) besides the Federal Reserve and briey explain how it does so. Question 2) For each of the following, draw a supply and demand diagram for the overnight interest rate. Also, provide a brief written explanation of your answer and what will happen to the overnight interest rate. a) Currently the equilibrium overnight rate is 4% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 5% and pays 4% for reserves. Show what will happen if the economy booms. b) Currently the equilibrium overnight rate is 3% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 3% and it pays 3% on reserves. Show what will happen if the Fed sells bonds to banks. c) Currently the equilibrium overnight rate is 4% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 5%. The Central Bank also pays 3% on any deposits banks keep at the Central Bank. Show what will happen if the economy enters into recession. Question 3) a) b) 0) If the Federal Reserve commits to money supply growth of 2% per year, then the economy enters recession, it would be time consistent to raise the growth rate to 5%. Ifhouseholds decide to hold more currency and pull money out of banks, this has no immediate effect on the money supply. [fhouseholds decide to hold more currency and pull money out of banks, this has an effect on the money supply over time. Question 4) a) b) 0) The ability of the Federal Reserve to set the growth rate of the money supply is a good example of goal independence. When setting monetary policy, the Federal Open Market Committee targets monetary aggregates like M1. Countries that use ination targeting attempt to set the ination rate to 0. Question 5) Quick Answers. For each of the following you only need to provide a one or two-word response (choose one of the underlined phrases for each statement). a) b) 0) d) g) 11) Historically in the United States southern interests typically @ or did not support the Second Bank of the United States. According the political business cycle theory, there would be a tendency to increase/decrease the money supply before an election. All else the same, an increase in Treasury deposits to the Fed will increasefdecrease the monetary base. Over the course of 1931-1934, the currency ratio in the United States increased/decreased. Targeting non-borrowed reserves/federal funds rate will tend to increase the volatility of interest rates in the economy. Open market operations to offset a change in reserves demand would be an example of a defensive/dmamic open market operation. [fination becomes more sensitive to changes in the output gap, this likely means that beta is higher/lower. Implementing ination targeting is thought to increase/decrease the transparency of the Central Bank