Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence returns. (1) Reserve Ratio, % (1) 10 (2) Checkable Deposits $ 20,000 (4) Required Reserves (5) Excess Reserves (6) Money-Creating Potential of Single Bank, (5) (7) Money-Creating Potential of Banking System $ 30,000 (3) Actual Reserves $5,000 $ 2,000 $ 3,000 $ 3,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 (4) 30 20,000 5,000 6,000 -1,000 1,000 -3,333 Instructions: In part a, enter your answer as a whole number. In part b. round your answers to 2 decimal places. In part c, enter your answer as an absolute value a. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? 15 O percentage points b. What is the size of the monetary multiplier before the change in the reserve ratio? 10.00 O What is the size after the change? 667 O

There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRP,) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRP, DRPt, and LP). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. Inverted yield curve Downward-sloping yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. Statements If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new…

Assume the inflation rate is 6% and there is every indication that price levels will continue to rise. The Fed should engage in which policy with respect to open market operations: Buy bonds Sell bonds. Increase reserve ratio Decrease reserve ratio

Applied Problems on Monetary Policy and Interest Rates 1. For each of the following questions, draw the Money Demand curve (MD) and Money Supply curve (MS) and label the equilibrium interest rate as i*. Also show how the MS- MD graph changes due to the given events and as a result how the equilibrium interest rate changes. (In your answer you should clearly state and show what happens to the MS and MD curves and also what happens to the interest rate).