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Question #4: The Monetary System (16 Points] Use Scenario 1 to answer Part (a) Scenario 1 California United Bank owns assets in the form of
Question #4: The Monetary System (16 Points] Use Scenario 1 to answer Part (a) Scenario 1 California United Bank owns assets in the form of reserves, loans and bonds. It currently holds $35 million in bonds and $15 million in total reserves. Its only liability is $87.5 million in checkable deposits. Assume that the reserve requirement ratio in the banking system is 8%. (a) Use the information in Scenario 1 to fill in the blanks of the balance sheet for California United Bank. [6 Points) Balance Sheet: California United Bank Assets Liabilities Required Reserves: Checkable Deposits: $87.5 Million Excess Reserves: Loans: Bonds: $35 million Use Scenario 2 to answer Part (b). Scenario 2 The balance sheet for Luther Savings Bank is provided below. Assume that excess reserves are equal to 0 for all banks in the banking system and households do not hold currency. Balance Sheet: Luther Burbank Savings Assets Liabilities Required Reserves: $12,000 Checkable Deposits: $100,000 Loans: $73,000 Bonds: $15,000 (b) Suppose that Angelo sells $15,000 worth of bonds to the Federal Reserve. He immediately deposits all the proceeds from the sale into his checking account at Luther Burbank Savings. By how much will the total money supply in the economy change based on this transaction? [4 Points] () Define the discount rate. What effect would an increase in the discount rate have on the money supply in the economy? Explain your answer. [6 Points)
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