Describe the roles of money

Unit 7 [BU204]

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Unit 7 Assignment: Money, Banks, and the Federal Reserve System

1. Your Assignment should have a cover sheet with the following information:

● Your Name

● Course Number ● Section Number ● Date

2. You may submit your Assignment using the Unit 7 Assignment template.

 

3. Your answers should follow APA formatting by being in double-spaced paragraph format, with citations to your sources and, at the bottom of your last page, a list of references. Your answers should also be in Standard English with correct spelling, punctuation, grammar, and style.

4. Respond to the questions in a thorough manner, providing specific examples of concepts, topics,

definitions, and other elements asked for in the questions. Your answers should be highly

organized, logical, and focused. Assignment

This Assignment deals with money, the Federal Reserve System, and the effects of money growth on the rate of inflation. In this Assignment, assume you are hired as an assistant quantitative analyst at a

bank and one of your duties is calculating reserves and loans based on the total deposits in the bank. Given the scenarios provided below, complete the tables and explain the computation results. This

Assignment requires a combination of short paragraph answers, computations, and completion of a 450-500 word essay. This Assignment will assess your knowledge based on the following outcome:

BU204-4: Describe the roles of money, banking, and the Federal Reserve System in the macro economy.

1) This section deals with increase in money supply given two scenarios (see “a” and “b” below). In Westlandia, the public holds 50% of money one (M1) in the form of currency, and the required

reserve ratio is 20%.

a) Estimate how much the money supply will increase in response to a new cash deposit of $500 by

completing the accompanying table and calculate the new total money supply.

(Hint: The first row shows that the bank must hold $100 in minimum reserves — 20% of the $500 deposit — against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be

deposited in round 2 from the loan granted in Round 1.)

 

 

Unit 7 [BU204]

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Round Deposits Required

reserves

Excess

reserves

Loans Loan proceeds held as currency

Loan proceeds deposited

1 $500.00 $100.00 $400.00 $400.00 $200.00 $200.00

2 $200.00

3

4

5

6

7

8

9

10

Totals

 

b) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking

system and the public does not hold any of the loans in currency? (Hint: Complete the table below when none of the loan proceeds are held in currency following the example for row 1.)

Round

Deposits

Required reserves

Excess reserves

Loans

Loan proceeds held as currency

Loan proceeds deposited

1 $500.00 $100.00 $400.00 $400.00 0.00 $400.00

2 $400.00

3

4

5

6

7

8

9

10

 

Totals

 

 

Unit 7 [BU204]

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c) Calculate the Money Multiplier for question 1. a.) based on its computed change in money

supply, and calculate the Money Multiplier for question 1. b.) based on its computed change in money supply. What does this imply about the relationship between the public’s desire for holding currency and the money multiplier? Which scenario will contribute more to increase in money

supply? 2) Explain how each of the following situations changes quantity of money (money supply) in the

economy, based on its computed change in money supply.

a) The Federal Reserve System buys bonds

b) The Federal Reserve System auctions credit c) The Federal Reserve System raises the discount rate d) The Federal Reserve System raises the reserve requirement

 

3) Assume that in a country the total holdings of banks were as follows:

 

Bank Amount in million dollars

Required Reserve $45

Excess Reserve $15

Deposits $750

Loans $600

Treasury Bonds $90

 

a) Show that the balance sheet balances if these are the only assets and liabilities.

b) Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks do not change their holdings of Treasury bonds?

c) How much does the money supply change by?

 

4) Complete the following in 450-500 word essay. As an assistant quantitative analyst for this bank, what can you assume from these results? What recommendations can you provide to your senior

manager on loan rates, depending on the Federal Reserve System’s ratio percentage? What should the bank do when the Fed raises the discount rate and the Federal Funds Rate? What should the bank do when the Fed increases and decreases the reserve ratio to change the reserve

requirement? Directions for Submitting Your Assignment

Before you submit your Assignment, you should save your work on your computer in a location and with a name that you will remember. Make sure your Assignment is in the appropriate template provided. Then, when you are ready, you may submit to the Dropbox.

 

 

Unit 7 [BU204]

Page 4 of 4

 

Unit 7 Assignment: Money, Banks, and the Federal Reserve System

Points Possible

Points Earned

Content and Analysis

Problem # 1

Correctly completed table under (“a”).

6

Correctly completed table under (“b”). 6

Explained the relationship between the public’s desire for holding

currency and the money multiplier. (“c”)

4

Problem #2 Identified changes in money under scenarios. (“a–d”)

6

Problem #3

Balanced the balance sheet. (“a”)

5

Correctly calculated each value. (“b”) 6

Correctly calculated and explain the change in money supply. (“c”) 6

Problem #4

Recommended appropriate loan rates based on the reserve ratio. Explained the actions of the banks when the Fed increases the discount rate and the Federal Funds Rate. Described the actions of banks when

the Fed increases and decreases the reserve ratios.

6

 

Writing style, grammar, and APA formatting. 5

Total 50

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