. il Iinveslor purehases a 30-year mnicipal bond for 5960. The bond's coupon rate is 8 percent and, it still had 16 years remaining until maturity. If the investor holds the bond until it matures and collects the $1000 par value from the municipality and his marginal tax rate is 34 percent, what will be his (effective) yield to maturity? Make sure to show your work. (5 points) 6. Suppose that the public wishes to hold S0.35 in pocket money (currency and coin) and S0.25 in time and savings deposits. Suppose that banks wish to hold $0.20 for each new dollar of transaction money received. Suppose that $0.05 finds its way outside of the domestic banking system. Suppose the reserve requirement on transaction deposits is 3 percent and that on time and savings deposits is 4%. (20 points) a. What is the size of the transaction deposit multiplier? Make sure to show your work. b. What is the size of the money multiplier? Make sure to show your work. c. Suppose S5 million in new excess reserves appear in the banking system. How much will be created in the form of deposits and loans? Make sure to show your work. d. By how much did the leakages of funds from the banking system reduce the size of the transaction deposit multiplier? (Hint: compute the simple transaction deposit multiplier). Make sure to show your work. If the Fed purchases $175 billion worth of government securities on the open market, what is the effect on the money supply? Make sure to show your work. e. Compare and contrast the expectations theory and the liquidity premium theory of the term 7 . il Iinveslor purehases a 30-year mnicipal bond for 5960. The bond's coupon rate is 8 percent and, it still had 16 years remaining until maturity. If the investor holds the bond until it matures and collects the $1000 par value from the municipality and his marginal tax rate is 34 percent, what will be his (effective) yield to maturity? Make sure to show your work. (5 points) 6. Suppose that the public wishes to hold S0.35 in pocket money (currency and coin) and S0.25 in time and savings deposits. Suppose that banks wish to hold $0.20 for each new dollar of transaction money received. Suppose that $0.05 finds its way outside of the domestic banking system. Suppose the reserve requirement on transaction deposits is 3 percent and that on time and savings deposits is 4%. (20 points) a. What is the size of the transaction deposit multiplier? Make sure to show your work. b. What is the size of the money multiplier? Make sure to show your work. c. Suppose S5 million in new excess reserves appear in the banking system. How much will be created in the form of deposits and loans? Make sure to show your work. d. By how much did the leakages of funds from the banking system reduce the size of the transaction deposit multiplier? (Hint: compute the simple transaction deposit multiplier). Make sure to show your work. If the Fed purchases $175 billion worth of government securities on the open market, what is the effect on the money supply? Make sure to show your work. e. Compare and contrast the expectations theory and the liquidity premium theory of the term 7
