Consider a bank with total deposits of 20,000, a reserve requirement of 10%, and a net...

 

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Consider a bank with total deposits of 20,000, a reserve requirement of 10%, and a net worth of 2,000. Suppose that this bank has set its reserves at twice the required level while allocating 1/2 of its remaining assets to Treasury bonds and the remaining 1/2 to loans. (a) Write down the bank's balance sheet. (b) Suppose that the Federal Reserve purchases one-third of this bank's Treasury bonds. Show the change in the bank's balance sheet before any other actions are taken. (c) Is this expansionary or contractionary monetary policy? Explain. (d) Suppose that - soon after the Fed's purchase the value of the bank's loans falls by 5% due to defaults. Write down the new balance sheet. (e) List three challenges that the Fed faces when conducting expansionary monetary policy. - Consider a bank with total deposits of 20,000, a reserve requirement of 10%, and a net worth of 2,000. Suppose that this bank has set its reserves at twice the required level while allocating 1/2 of its remaining assets to Treasury bonds and the remaining 1/2 to loans. (a) Write down the bank's balance sheet. (b) Suppose that the Federal Reserve purchases one-third of this bank's Treasury bonds. Show the change in the bank's balance sheet before any other actions are taken. (c) Is this expansionary or contractionary monetary policy? Explain. (d) Suppose that - soon after the Fed's purchase the value of the bank's loans falls by 5% due to defaults. Write down the new balance sheet. (e) List three challenges that the Fed faces when conducting expansionary monetary policy. -

Answer rating: 100% (QA)

Answer a The banks balance sheet would look like this Assets Cash on hand 2000 Treasury bonds 10000 ... View the full answer