Unit 8 Assignment Template: Money, Banking, and the Federal Reserve System

Assignment

This assignment deals with how banks "create" money through making loans and how the change in money supply is calculated, as well as how to calculate the money multiplier.In addition, this assignment examines the tools utilized by the Federal Reserve System to influence the money supply.

1. In the hypothetical country of Westlandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds 50% of the loans as currency in circulation and redeposits the remaining 50% percent of the loans.

a. Complete the table (calculations should be to no more than two decimal places).

Round	Deposits	Required Reserves of 20%	Excess Reserves	New Loans	50% of loan proceeds are held as currency in circulation by people	Loan proceeds redeposited
1	$500
2
3
4
5
6
7
8
9
10
Totals

b. Calculate the new money supply.

(Enter response here.)

c. Calculate the money multiplier.

(Enter response here.)

2. In the hypothetical country of Middlelandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans.

a. Complete the table (calculations should be to no more than two decimal places).

Round	Deposits	Required Reserves of 20%	Excess Reserves	New Loans	None of loan proceeds are held as currency in circulation by people	Loan proceeds redeposited
1	$500
2
3
4
5
6
7
8
9
10
Totals

b. Calculate the new money supply.

(Enter response here.)

c. Calculate the money multiplier.

(Enter response here.)

3. In the hypothetical country of Eastlandia, banks are required to hold 10% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans.

a. Complete the table (calculations should be to no more than two decimal places).

Round	Deposits	Required Reserves of 10%	Excess Reserves	New Loans	None of loan proceeds are held as currency in circulation by people	Loan proceeds redeposited
1	$500
2
3
4
5
6
7
8
9
10
Totals

b. Calculate the new money supply.

(Enter response here.)

c. Calculate the money multiplier.

(Enter response here.)

4. Describe in detail the differences between the three hypothetical countries money supplies, money multipliers, and likely impacts on each economy.

(Enter response here.)

5. Explain how each of the following situations changes the quantity of money (money supply) in the economy, based on its computed change in money supply.

a. The Federal Reserve System buys bonds.

(Enter response here.)

b. The Federal Reserve System auctions credit.

(Enter response here.)

c. The Federal Reserve System raises the discount rate.

(Enter response here.)

d. The Federal Reserve System raises the reserve requirement.

(Enter response here.)