19 May Unit 7 [BU204]Page 1 of 4Unit 7 Assignment: Money, Banks, and the
Unit 7 [BU204]Page 1 of 4Unit 7 Assignment: Money, Banks, and theFederal Reserve System1. Your Assignment should have a cover sheet with the following information:● Your Name● Course Number● Section Number● Date2. 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, withcitations to your sources and, at the bottom of your last page, a list of references. Your answersshould 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 behighlyorganized, logical, and focused.AssignmentThis Assignment deals with money, the Federal Reserve System, and the effects of money growth onthe rate of inflation. In this Assignment, assume you are hired as an assistant quantitative analyst at abank 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. ThisAssignment requires a combination of short paragraph answers, computations, and completion of a450-500 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 macroeconomy.1) This section deals with increase in money supply given two scenarios (see “a” and “b” below). InWestlandia, the public holds 50% of money one (M1) in the form of currency, and the requiredreserve ratio is 20%.a) Estimate how much the money supply will increase in response to a new cash deposit of $500 bycompleting 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 $500deposit — 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 bedeposited in round 2 from the loan granted in Round 1.)Unit 7 [BU204]Page 2 of 4Round Deposits RequiredreservesExcessreservesLoans Loan proceedsheld as currencyLoan proceedsdeposited1 $500.00 $100.00 $400.00 $400.00 $200.00 $200.002 $200.00345678910Totalsb) Estimate how much the money supply will increase in response to a new cash deposit of $500 bycompleting the accompanying table and calculate the new total money supply. How does youranswer compare to an economy in which the total amount of the loan is deposited in the bankingsystem and the public does not hold any of the loans in currency? (Hint: Complete the table belowwhen none of the loan proceeds are held in currency following the example for row 1.)Round DepositsRequiredreservesExcessreserves LoansLoan proceedsheld as currencyLoan proceedsdeposited1 $500.00 $100.00 $400.00 $400.00 0.00 $400.002 $400.00345678910TotalsUnit 7 [BU204]Page 3 of 4c) Calculate the Money Multiplier for question 1. a.) based on its computed change in moneysupply, and calculate the Money Multiplier for question 1. b.) based on its computed change inmoney supply. What does this imply about the relationship between the public’s desire for holdingcurrency and the money multiplier? Which scenario will contribute more to increase in moneysupply?2) Explain how each of the following situations changes quantity of money (money supply) in theeconomy, based on its computed change in money supply.a) The Federal Reserve System buys bondsb) The Federal Reserve System auctions creditc) The Federal Reserve System raises the discount rated) The Federal Reserve System raises the reserve requirement3) Assume that in a country the total holdings of banks were as follows:Bank Amount in million dollarsRequired Reserve $45Excess Reserve $15Deposits $750Loans $600Treasury Bonds $90a) 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 bankchanges the reserve requirement ratio to 2%, banks still want to hold the same percentage ofexcess 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 seniormanager on loan rates, depending on the Federal Reserve System’s ratio percentage? Whatshould the bank do when the Fed raises the discount rate and the Federal Funds Rate? Whatshould the bank do when the Fed increases and decreases the reserve ratio to change the reserverequirement?Directions for Submitting Your AssignmentBefore you submit your Assignment, you should save your work on your computer in a location andwith a name that you will remember. Make sure your Assignment is in the appropriate templateprovided. Then, when you are ready, you may submit to the Dropbox.Unit 7 [BU204]Page 4 of 4Unit 7 Assignment: Money, Banks, and the Federal ReserveSystemPointsPossiblePointsEarnedContent and AnalysisProblem # 1Correctly completed table under (“a”).6Correctly completed table under (“b”). 6Explained the relationship between the public’s desire for holdingcurrency and the money multiplier. (“c”)4Problem #2Identified changes in money under scenarios. (“a–d”)6Problem #3Balanced the balance sheet. (“a”)5Correctly calculated each value. (“b”) 6Correctly calculated and explain the change in money supply. (“c”) 6Problem #4Recommended appropriate loan rates based on the reserve ratio.Explained the actions of the banks when the Fed increases the discountrate and the Federal Funds Rate. Described the actions of banks whenthe Fed increases and decreases the reserve ratios.6Writing style, grammar, and APA formatting. 5Total 50
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