Assignment 1

1. Explain what is meant by the saying banks "create" money (Hint: watch the meaning of the word, it has a double meaning). If the required reserve ratio is 8%, what is the simple deposit multiplier? If we observed that in the real world the actual deposit multiplier was lower than this, what might be some causes?

1. Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit (show your calculations for all steps in this problem):

• Bank A's reserves immediately increase by $______.
• Bank A's required reserves increase by $______.
• Bank A's excess reserves increase by $______.
• Bank A can make a maximum new loan of $______.
• Checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of $______.

1. What is a bank run? How does this relate to the idea of fractional reserve banking? What innovation during the Great Depression -- still in place today -- greatly reduced the risk of bank runs in the United States?

1. Explain the three key economic tools that the Federal Reserve has when it looks to implement monetary policy. Which one does the Fed rely upon the most, and why? Find an academic article to support your findings and post the link/reference with your assignment.

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