Reference no: EM133151510

Question 1.

The Federal Reserve purchases $50,000 in U.S. government securities from XYZ securities Dealers to stimulate a sluggish economy. The Fed has set the reserve requirement at 20 percent.

Your job is to trace the path of the Fed's $50,000 purchase through four loans transactions from First Bank through Fourth Bank.

a) Fill in each bank's balance sheet with the amount of the new deposit, required reserves, excess reserves, and the amount of the loan.

b) Calculate the total money creation in the economy with the help of formula.

Question 2:

Fill in the blanks with the correct answer as required.

(Money supply, increase, reserve requirement, fractional reserve, required reserves, decrease)

1. The U.S. banking system operates under a which means banks are required to keep a fraction of their customers' deposits as ..............................

2. If you add all coin and currency in people's hands plus the funds available in checking accounts, you get a measure of the ..........................

3. limit the amount of new checkbook money that can be created when banks lend their excess reserves.

4. When the Federal Reserve Bank raises the reserve requirement, the money supply will most likely .......................

5. When the Federal Reserve lowers the reserve requirement, the money supply will most likely ................