BU 773

Foundations of Economics and Statistics

ASSIGNMENT 7

Dr. Fusaro

Instructions: Prepare your answers in a document. It should look professional. Professionalism includes:

. it is typed because it is easy to read.

. equations are formatted properly because it is very difficult to read in-line equations when fractions are compressed into one line.

. you should show your calculations because your reader might need to understand how you got your answer in order to (1) make sure it is correct and (2) understand how to interpret your answer.

. neatly rendered graphs because messy pictures make your document look more like a working draft than a final product - like you are not finished.

. proofread because spelling and grammar mistakes (1) distract from your point, and reduce your credibility as an educated, intellectual person of authority.

. explain your answer because sometimes the answer itself is not important, rather the explanation is the important part.

. formatted because appearance matters for clarity. Does it look right? Is the font consistent? Do the tables look right?

. it is easy for the reader to find the final answer.

. adequate spacing makes it easy to read.

. repeat the question and make sure it is clear what is question and what is answer because it is much easier to find and understand the answer if the question is near.

. a cover page makes every professional document look like you really care about the client's business or boss's opinion.

1.There is a 12.5% reserve requirement. Suppose the fed prints $2,000,000 which gets deposited into Bank A. Bank A loans the money which gets deposited into Bank B. Bank B loans the money, etc.

a.Download the excel table titled "Assignment7Table" and fill in the table and submit the excel file with your answer document.

b.Use the formula to calculate the deposits and reserves for the entire banking system (i.e., not just banks A through O, but all banks).

2.What was the Fed's announced monetary policy decision at the June 9-10, 2020 FOMC meeting?What rationale did the fed give for its decision?What hints did they give toward their outlook on the future? How did the financial markets receive their decision? You should be able to find the answer to all of these questions in one or two news reports following the meeting or in the press release issued by the fed.

3.Using Fischer's Quantity Theory of Money, calculate inflation if velocity remains constant at 4.5 and real GDP increases from $800 billion to $9000 billion while the money supply increases from $1.50 trillion to $1.60 trillion.

4.

Tell what the axes of the Phillips Curve represent by adding labels to the axes of the adjacent graph.

5.During the holiday shopping season, when the public's holding of currency increases, what defensive open market operations would you expect? Why?

6.Who votes on the FOMC?

7.If the Fed decides to use open market operations to raise the interest rate what will it do? Be specific about who within the Federal Reserve

System makes the decision, and who else is involved in the process.

8.If the Fed decides to use discount policy to increase the money supply what will it do? Be specific about who within the Federal Reserve System makes the decision, and who else is involved in the process.

9.Suppose that the required reserve ratio is 7.5%. If the Fed sells $530 million of bonds to the First National Bank. What happens to reserves and the monetary base? What will happen to the money supply? Show the changes in The Federal Reserve's balance sheet, First National Bank's balance sheet, and the collective banking system's balance sheet.

10.If the Fed raises the discount rate what effect will this have on the monetary base and on the money supply?

11.Suppose that the economy is in a long run equilibrium.

a.) Draw an Aggregate Supply - Aggregate Demand graph of the economy. Label the equilibrium point "E1". The Fed conducts an open market sale of bonds. On your graph, show the movement of the appropriate curves in the short-run AND long-run. Label the short run equilibrium point "E2" and label the long run equilibrium point "E3"

b.) Draw an Aggregate Supply - Aggregate Demand graph of the economy. Label the equilibrium point "E1". The Fed conducts an open market purchase of bonds. On your graph, show the movement of the appropriate curves in the short-run AND long-run. Label the short run equilibrium point "E2" and label the long run equilibrium point "E3"

12.The included spreadsheet titled "Assignment7Data.xlsx" contains data on bank reserves and the money supply. Use it to answer the following questions. Report all of your results in your answer document, there is no need to upload the spreadsheet or other statistical software files.

a.Regress the money supply on bank reserves. (i.e. Your independent, x, variable is bank reserves, your dependent, y, variable is money supply.) You may accomplish this by doing the work manually, or by using excel's regression function, or by using another statistical software package. Report your results in your answer document.

b.Consider (1) the regression equation M = B₀ + B₁ R; if we focus on the change in reserves thus ignoring the constant term, then what is left is M = B₁ R. Consider also (2) the equation that we learned in our lesson on multiple deposit expansion: D = R/rrr. Consider finally that deposits and money are the same thing, D=M. Use the regression results from part (a) and these equations to quantify the rrr . Interpret your result.

c.Tell whether 1 is statistically significant. Explain your answer and show your work.

d.Tell what percentage of the variation in the money supply is accounted for by the variation in bank reserves.

e.Estimate the average value of the money supply when bank reserves are 20 billion dollars. What is the confidence interval for this prediction?

f.A Federal Reserve insider tells you that they plan to set reserves at 25 billion by 2020. Estimate the value of the money supply in 2020 supposing that they achieve this goal. What is the confidence interval for this prediction