Can you check my work
4. (50 pts.) Assume the public in the small country of Harvardia does not hold any cash. Commercial banks, however, hold 5% of their checking deposits as excess reserves, regardless of the interest rate. Excess Reserves = 5% of Deposits. $2000 x .05 = $100 Reserves = Required reserves + Excess Reserves $400 = R + $100 R = $300 R% = The required reserve ratio is 15% 4(a). Consider the balance sheet of one of several identical banks: ASSETS LIABILITIES & NET WORTH Reserves Loans $ 400 Checking Deposits $1,600 Net Worth $2,000 $ 0 What is the required reserve ratio? 4(b). If the total money stock (supply) is $100,000, find the total amount of reserves held in the banking system. Show your work. Use a diagram to show what the money supply curve looks like for this economy, fully labeled. Same deal as with #1, no available graph insert. Will not be graded on graph Money Supply = total deposits + cash held by public $100,000 = total deposits + $1600 total deposits = $98,400 total deposits = reserves x $98,400 = reserves x $98,400 = reserves x Total Reserves = $19,680 4(c). The Harvardia Central Bank decides that it wants to cut the money stock in half. It is considering an open market operation. How many dollars worth of bonds should the Central Bank buy or sell? Assume that excess reserves are 5% and the required reserve ratio is what you found in part a. Show your work. . Money multiplier remains: New money Stock (supply) = $50,000 Money Supply = total deposits + cash held by public $50,000 = total deposits + $1600 total deposits = $48400 total deposits = reserves x $48,400 =new reserves (bonds) x New bond value = $9680 Change in Bond value = $19,680 - $9680 Change in Bond Value = $10,000 The Harvardia Central Bank must sell $10,000 worth of bonds to cut the money stock in half. 4(d) Part 1. Beginning from the money market equilibrium that prevailed before the open market operation, explain the effect of the Central Bank's policy on the equilibrium interest rate. Will the interest rate change more if the money demand curve is steeper or flatter? Explain with reference to one welllabeled diagram and upload the diagram in Part 2 of this question (see below). (Hint: On one diagram, show both a steep and a flat money demand curve, along with one money supply curve. Then show what happens along the two curves as the money supply changes. To explain your result, think about what a steeper or flatter money demand curve implies about money demand.) Important: Below is a brief video tutorial on creating and submitting diagrams. Hint: Click on the "Expand" icon in the lower right corner of the video to see a clearer, full screen version. When the central bank decided to decrease the money stock in half, they sold $10,000 worth of bonds, which was a contractionary money policy. As a result, the equilibrium interest rate would rise after the transaction. This action is displayed in the attached graph, where the money supply M* moves to M2*, resulting in a shift in equilibrium interest rate from i1* to i2*. Consequentially, if the money demand curve was flatter, depicted in the MD depicted in green, the change in the equilibrium interest rate, green i1* to i2*, would be much less of an increase than depicted in the original MD curve. 4. (50 pts.) Assume the public in the small country of Harvardia does not hold any cash. Commercial banks, however, hold 5% of their checking deposits as excess reserves, regardless of the interest rate. Excess Reserves = 5% of Deposits. $2000 x .05 = $100 Reserves = Required reserves + Excess Reserves $400 = R + $100 R = $300 R% = The required reserve ratio is 15% 4(a). Consider the balance sheet of one of several identical banks: ASSETS LIABILITIES & NET WORTH Reserves Loans $ 400 Checking Deposits $1,600 Net Worth $2,000 $ 0 What is the required reserve ratio? 4(b). If the total money stock (supply) is $100,000, find the total amount of reserves held in the banking system. Show your work. Use a diagram to show what the money supply curve looks like for this economy, fully labeled. Same deal as with #1, no available graph insert. Will not be graded on graph Money Supply = total deposits + cash held by public $100,000 = total deposits + $1600 total deposits = $98,400 total deposits = reserves x $98,400 = reserves x $98,400 = reserves x Total Reserves = $19,680 4(c). The Harvardia Central Bank decides that it wants to cut the money stock in half. It is considering an open market operation. How many dollars worth of bonds should the Central Bank buy or sell? Assume that excess reserves are 5% and the required reserve ratio is what you found in part a. Show your work. . Money multiplier remains: New money Stock (supply) = $50,000 Money Supply = total deposits + cash held by public $50,000 = total deposits + $1600 total deposits = $48400 total deposits = reserves x $48,400 =new reserves (bonds) x New bond value = $9680 Change in Bond value = $19,680 - $9680 Change in Bond Value = $10,000 The Harvardia Central Bank must sell $10,000 worth of bonds to cut the money stock in half. 4(d) Part 1. Beginning from the money market equilibrium that prevailed before the open market operation, explain the effect of the Central Bank's policy on the equilibrium interest rate. Will the interest rate change more if the money demand curve is steeper or flatter? Explain with reference to one welllabeled diagram and upload the diagram in Part 2 of this question (see below). (Hint: On one diagram, show both a steep and a flat money demand curve, along with one money supply curve. Then show what happens along the two curves as the money supply changes. To explain your result, think about what a steeper or flatter money demand curve implies about money demand.) Important: Below is a brief video tutorial on creating and submitting diagrams. Hint: Click on the "Expand" icon in the lower right corner of the video to see a clearer, full screen version. When the central bank decided to decrease the money stock in half, they sold $10,000 worth of bonds, which was a contractionary money policy. As a result, the equilibrium interest rate would rise after the transaction. This action is displayed in the attached graph, where the money supply M* moves to M2*, resulting in a shift in equilibrium interest rate from i1* to i2*. Consequentially, if the money demand curve was flatter, depicted in the MD depicted in green, the change in the equilibrium interest rate, green i1* to i2*, would be much less of an increase than depicted in the original MD curve
