Could you help me complete the whole thing? Math problems

Social Analysis 10 Spring 2006 Problem Set 3 (Due March 24 2006) Question 1 Bank A is the only bank in the country of Sunny-weather. The total cash held by the public in Sunny-weather is $4,000. Initially, Bank A's balance sheet is as follows: Assets Reserves Loans Total Liabilities and Net Worth $2,500 Checking Deposits $6,000 $5,500 Net Worth Total (a) Complete Bank A's balance sheet. (b) Compute money supply in Sunny-weather. (c) How much is the reserve required ratio in Sunny-weather if Bank A holds only required reserves? Show and explain your work. (d) Assume instead that the reserve required ratio is 10%, how much does Bank A has to hold as required reserves? Is Bank A holding excess reserves? In which amount? (e) Continue to assume that the reserve required ratio is 10% and the bank's management decides to keep the same level of excess reserves. Compute the money multiplier in the country of Sunny-weather. Question 2 For simplicity, assume that there is only one bank in the economy, located in Harvard Square, and that its balance sheet is initially depicted as below: Assets Liabilities and Net Worth Reserves: $1 million Deposits: $10 million Loans: $12 million Net Worth: $3 million Total: $13 million Total: $13 million 1 Assume that the reserve requirement is 10 percent and that the bank never holds excess reserves. Suppose now that someone robs the bank. Despite the ensuing shootout, one of the thieves manages to escape with $500,000, which he subsequently buries in his backyard. (a) What is the maximum change in the money supply? Explain. (b) Now show the bank's final balance sheet, assuming that the money supply changes by the maximum amount. Question 3 There is exactly $10m of cash held by the public in Country A. The total amount of checking deposits stands at $80m. Assume throughout the question that the amount of cash held by the public never changes. (a) What is the total money stock? (b) The treasury sells $5m worth of bonds to one of his employees and immediately distributes all the proceeds to the buyer of the bonds. Show in the balance sheet of the buyer of the bonds all the changes that will occur to his assets, liabilities and net worth. (c) What is the new total money stock? Explain. (d) Assume that all banks in the country currently hold 10% of checking deposits as reserves. If the central bank wants to use an open market operation to expand the money supply by $20m, what will that operation be, and in what amount? Show on the central bank's balance sheet all the changes that will occur to its assets, liabilities and net worth. Question 4 Citizens of Panicville do not hold cash, but hold checking deposits and a lot of government bonds. All banks in Panicville always hold only 10% of checking deposits in reserves. The central bank wants to use open market operations to decrease the money stock by $10m. Should it sell or buy government bonds? What total dollar value of government bonds should it sell or buy? 2 Question 5 Assume that the velocity of money is constant in the long run. If the money supply increases by 10%, and real GDP increases by 2%, what will happen to the price level? Show your work. Question 6 On a well-labeled graph, show how the following changes will shift the money demand and/or the money supply curves. Show the initial and final equilibrium interest rate and quantity of money. Explain why the equilibrium in the money market changes as you illustrate in your graphs. (a) Real GDP is rising but the price level is constant. At the same time, the Fed increases the reserve requirement from 8% to 10%. Banks do not hold excess reserves. (b) The Fed sells bonds in the open market while the economy is experiencing high inflation. 3