problem 1: Assume that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks employ the resultant increase in reserves to purchases bonds from the public and not to make loans. The public deposit the revenue from selling bonds in their checking account. Determine the T-account of the banking system look like when the banking system is in equilibrium? What will occur to checkable deposits? We suppose that:

a) The required reserve ratio on checkable deposits is 10%
b) Banks do not hold any excess reserves, and
c) The public’s holdings of currency don’t change.

problem 2: The economy of Cotai contains 2000 $1 bills.

a) If people hold all money as currency, what is the quantity of money?

b) If people hold all money as demand deposits and banks maintain 100 % reserves, determine the quantity of money?

c) If people hold equivalent amounts of currency and demand deposits and banks maintain 100 % reserves, determine the quantity of money?

d) If people hold all money as demand deposits and banks maintain a reserve ratio of 10 %, what is the quantity of money?

e) If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 %, find out the quantity of money?

problem 3: If banks expect an unusually large increase in withdraws from the checking deposit accounts in the near future, what would occur to the federal funds rate, borrowed reserves and non-borrowed reserves? Draw a graph and employ the supply and demand analysis of the market for reserves to answer the problem.

problem 4: Throughout summer of 2006, China raised their reserve requirement for the banking system while maintaining a fixed target for the interbank lending interest rate. Draw a graph of the market for reserves when a central bank raises the reserve ratio while maintaining a fixed interest rate. What effect would such a policy have on the monetary base? If there is no excess reserve, what result would such a policy have on the money multiplier? Can we say what would be the effect on the money supply? (Suppose that the target interest rate is beneath the discount rate and the central bank in China doesn't pay interest on reserves.