EC $202-$ Homework $5$

Consider the following balance sheet as the baseline scenario for the questions $1$ and $2$ below. For each question, use the following baselines as your starting point.

Wensleudale's Bank Balance Sheet

Credit Market

Interi $1.$ The FOMC decides to conduct open market operations and sell $\backslash (\backslash$$ $20\backslash )$ million dollars of government bonds.

a$.$ Assume Wensleydale Bank purchased all $\backslash (\backslash$$ $20\backslash )$ million dollars of government bonds. Show how this would change the bank's balance sheet.

b$.$ By how much does the M$1$ money supply expand or contract $($e$.$g$.$ what is the change in the money supply? is it an increase or decrease?$)?$

c$.$ Does this move by the Fed count as expansionary or contractionary monetary policy?

d$.$ How does the credit market above change as a result of this policy action by the Fed? Draw the graph below and state in words the impact on the interest rate and equilibrium quantity of funds transacted.

e$.$ Consider the $\backslash ($ A D $/$ A S $\backslash )$ Model of the econorny above. How does the $\backslash ($ A D $\backslash )$ change with the FOMC's policy action?

$2.$ The Fed decides to lower the reserve requirement from $\backslash (10\backslash \%\backslash )$ to $\backslash (5\backslash \%\backslash )$

a$.$ Show how this would change Wensleydale's Bank's balance sheet.

b$.$ Does this move by the Fed count as expansionary or contractionary monetary policy?

c$.$ How does the credit market above change as a result of this policy action? Draw the graph below and state in words the impact on the interest rate and equilibrium quantity of loans.

d$.$ Consider the AD$/$AS Model of the economy above. How does AD change with the policy?