1. The central bank of the U.S, the Fed was established in 1913. Briefly explain the following: a. Why was the Fed established? b. What are the Fed's goals? c. What does it mean to say that the Fed operate under dual mandate policy? Briefly explain. d. What does it mean to say that the Fed is the lender of last resort to financial institutions?

2. Assume that banks have limited reserves (operate under limited reserve regime) and operate under fractional reserve ratio.

A) What monetary policy tools would the Fed use to change the reserves in the banks, the money supply.

3. Open Market Operations is the primary monetary policy tool in the time of banks' limited reserves to change the level of reserves in banks, the money supply and the short -term interest rates.

A)Briefly explain why the open market purchases of government bonds by the Fed increase the bank reserves and the money supply.

B) Briefly explain why the open market sale of government bonds by the Fed decreases the bank reserves and the money supply?

C) Explain how the following would change banks reserves, amount of loans, deposits creation

and the money supply in the economy:

a) The Fed raises the discount rate from 5% to 6%.

b) The Fed raises the reserve requirement from 10% to 11%.

c) The Fed buys $10 million worth short- term government bonds from commercial banks.

d) The Fed sells to Chase $20 million worth short -term government bonds.

4. A) Suppose that money supply in the economy is $50 million. If the Fed wanted to cause the money supply to expand by $5,000,000 in the time of limited reserves.

• The Fed should use the following open market operation

OMS ( ) OMP ( )

• How much should the Fed buy or sell in the government bonds to achieve its goal given the required reserve ratio 10%? Show your work.

B)Suppose that in the time of limited reserves the Fed makes a $40 million discount loan to the First National Bank by increasing the First National Bank account (reserves) at the Fed by $40 million.

• Assume that before receiving the loan, the First National Bank has no excess reserves. What is maximum amount of $40 million that the First National Bank can lend out?
• What would be the maximum increase in the money supply as the result of the Fed's loan? Assume that required reserve ratio is 10 percent.

Answer rating: 100% (QA)

1 The Federal Reserve the Fed was established in 1913 for several reasons a Stability and Control One of the primary reasons for establishing the Fed was to bring stability and provide centralized con... View the full answer