Unit 8 Assignment BU204 Money, Banking and Federal Reserve System

Download the assignment template from Course Documents, and insert your answers to each question in the appropriate places.

This assignment deals with how banks “create” money through making loans and how the change in money supply is calculated, as well as how to calculate the money multiplier. In addition, this assignment examines the tools utilized by the Federal Reserve System to influence the money supply.

1. In the hypothetical country of Westlandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds 50% of the loans as currency in circulation and redeposits the remaining 50% percent of the loans.

a. Complete the table (calculations should be to no more than two decimal places).

Round

Deposits

Required Reserves of 20%

Excess Reserves

New Loans

50% of loan proceeds are held as currency in circulation by people

Loan proceeds redeposited

1

$500

 

 

 

 

 

2

 

 

 

 

 

 

3

 

 

 

 

 

 

4

 

 

 

 

 

 

5

 

 

 

 

 

 

6

 

 

 

 

 

 

7

 

 

 

 

 

 

8

 

 

 

 

 

 

9

 

 

 

 

 

 

10

 

 

 

 

 

 

Totals

 

 

 

 

 

 

 

b. Calculate the new money supply.

c. Calculate the money multiplier.

2. In the hypothetical country of Middlelandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans.           

a. Complete the table (calculations should be to no more than two decimal places).

Round

Deposits

Required Reserves of 20%

Excess Reserves

New Loans

None of loan proceeds are held as currency in circulation by people

Loan proceeds redeposited

1

$500

 

 

 

 

 

2

 

 

 

 

 

 

3

 

 

 

 

 

 

4

 

 

 

 

 

 

5

 

 

 

 

 

 

6

 

 

 

 

 

 

7

 

 

 

 

 

 

8

 

 

 

 

 

 

9

 

 

 

 

 

 

10

 

 

 

 

 

 

Totals

 

 

 

 

 

 

b. Calculate the new money supply.

c. Calculate the money multiplier.

3. In the hypothetical country of Eastlandia, banks are required to hold 10% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans.

a. Complete the table (calculations should be to no more than two decimal places).

Round

Deposits

Required Reserves of 10%

Excess Reserves

New Loans

None of loan proceeds are held as currency in circulation by people

Loan proceeds redeposited

1

$500

 

 

 

 

 

2

 

 

 

 

 

 

3

 

 

 

 

 

 

4

 

 

 

 

 

 

5

 

 

 

 

 

 

6

 

 

 

 

 

 

7

 

 

 

 

 

 

8

 

 

 

 

 

 

9

 

 

 

 

 

 

10

 

 

 

 

 

 

Totals

 

 

 

 

 

 

b. Calculate the new money supply.

c. Calculate the money multiplier.

4. Describe in detail the differences between the three hypothetical countries money supplies, money multipliers, and likely impacts on each economy.

5. Explain how each of the following situations changes the 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.

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 is specified in item 1 of the General Instructions within your assignment template. When you are ready, you may submit to the Unit 8 Assignment Dropbox.

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