Information for Question 2A and 2B + Baseline: Suppose Happy Bank gets 1000 dollars as deposits, keeps 10% in reserves complying with the Federal Reserve directives, has 350 dollars worth of government bonds & its Net Worth (also known as Bank Capital) is equal to 0. * New Scenario: Starting from the baseline, Happy Bank for whatever reason starts holding 400 in reserves; but its Net Worth Remains at 0. * The next two slides contain the same information in a T account form Baseline Values Liabilities Values Bank Capital = Net Worth Reserves 10% of Deposits (or 51000 Total Assets Deposits Money Base) -Total Liabilities =50 Bonds $350 Loans 7?7 Total Assets S Total Liabilities $1000 Bank Capital = Assets Liabilities = 0 Assets = Liabilities Fed:10% in reserves Excess Reserves =77-71=77 Effective Reserves 77 i i et T e S Ef fective Reserve Ratio(ERR) Deposic 3317 % 1 Ef fective Money Multiplier (EMM) = FRR-7% = Effective Money Supply = Money Base Xx EMM =77x2?7=217 New Scenario \\EITTEH Liabilities Values Bank Capital = Net Worth Reserves Deposits (or $1000 Total Assets Money Base) -Total Liabilities = 50 Bonds 5350 Loans 5?? Total Assets SN Total Liabilities $1000 Bank Capital = Assets Liabilities = 0 Assets = Liabilities Fed:10% in reserves Excess Reserves =77 u? =77 i T T e S Effective Reserve Ratio(ERR) DeoiE 3 % 1 1 Effective Money Multiplier (EMM) = ERR = 7?% =27 Effective Money Supply = Money Base x EMM =?7x??=177 Question 2B (7 points) Define and contrast the following concepts i. M1and M2 money ii. Liquidity and Solvency problem of the banks iii. Expansionary and contractionary monetary policy with open market operations iv. Money Neutrality and Classical Dichotomy