1. In each of the following situations, explain what happens to the money supply and interest…

1. In each of the following situations, explain what happens to the money supply and interest rate. (1 point each)

a. The Fed sells government securities on the open market.

b. The Fed buys government securities on the open market.

c. Increased the discount rate.

d. Decreased the discount rate.

e. Increased the reserve requirement.

2. Draw a correctly labeled graph of the money market for each of the following scenarios. (3 points for each correctly drawn and labeled graph – 2 points for the graph and 1 point for the correct shift)

a. The aggregate price level increases

b. Real GDP falls

c. There is a dramatic increase in online banking.

3. The following tables represent the consolidated balance sheets of all commercial banks and the 12 Federal Reserve banks. Complete columns 1-3 based on the following scenarios. Each scenario is independent of the others so do not track the changes through each of the columns. (2 points for each scenario)

Assets:

A
B
C

Reserves
33

Securities
60

Loans
60

Liabilities and net worth:

Checkable deposits
150

Loans from Federal Reserve
3

Commercial banks

Assets:

A
B
C

Securities
60

Loans to commercial banks
3

Liabilities and net worth:

Reserves of commercial banks
33

Treasury deposits
3

Federal Reserve Notes
27

Federal Reserve Banks

a. A decline in the discount rate prompts commercial banks to borrow an additional $1 billion from the Federal Reserve Banks. Show the new balance-sheet figures in column A.

b. The Federal Reserve Banks sell $3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet figures in column B.

c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet figures in column C.