Homework 3
Answers posted 10/19
1. Does the Fed have better control over reserves or the monetary base? Explain.
2. Suppose the Fed sells $1,000 worth of securities to the public. Assuming that the reserve requirement is 25%, use t-accounts to show the resulting multiple deposit contraction (carry the t-accounts out through three steps). Use the simple multiplier formula to calculate the total fall in bank deposits.
3. Derive the money multiplier when C ≠ 0 and ER ≠ 0. Explain why it is smaller than the simple money multiplier.
4. Explain the shape of the reserve demand curve. (b) Explain the shape of the reserve supply curve.
5. Use reserve supply and demand diagrams to show how (a) open market operations, (b) borrowing from the Fed, and (c) changes in reserve requirements impact the federal funds rate.
6. Show graphically how an increase in financial market risk affects the federal funds rate, and how the Fed would respond in order to return the federal funds rate to its target value.
7. Show how the Fed's operating procedure limits the variability in the federal funds rate.
