Since banks earn no interest income on excess reserves, why do they hold excess reserves? Hint: if a bank is holding no excess reserves and it suffers a reserve deficiency because of a deposit outflow from the bank, what are the bank's options in dealing with the reserve deficiency?

1. Illustrate what are the main determinants of the amount of excess reserves held by banks?

2. Illustrate what is the primary determinant of deposits and the money supply in the long-run?

3.  Banks issue both transactions deposits (D) and time and savings deposits. Currently there are no reserve requirements on either time or saving deposits. Suppose the Fed 4 decided to impose reserve requirements on both time and savings deposits, other things equal. What would happen to the volume of D and M1? Why?

4. During the Great Depression years, the money supply declined by about 25%. Using our money supply model, explain this decline in the quantity of money? The following questions relate to material that may be on the 3rd exam. We'll see next week how much we cover.

5. What are the policy tools of the Fed? Which is most important? Why? (compare this tool with the others)

6. Distinguish between dynamic and defensive open market operations. Define repurchase agreements, matched sale/purchase agreements, and outright purchases. When does the Fed use each type?

7. What is the primary rationale for reserve requirements today? Would the Fed lose control over the money supply if reserve requirements were abolished? Explain.

8. What types of discount loans does the Fed make? Which is the most common?

9. What is the relationship between the discount rate and the federal funds rate since Jan. 2003.