Second Question:

a. When the government budget decit increases, all else constant, how are interest rates affected? Sketch a supply and demand graph of the market for loanable mds to support your answer. b. Under what conditions would an increase in the government budget decit NOT result in higher interest rates? Sketch the scenario in a supply and demand graph of the market for loanable funds. 7. Suppose that while you are cleaning out your closet, you try on an old jacket you haven't worn for a while, and nd $200 in one of the pockets. (Y ay! !) You deposit the $200 at your bank, Big Bank A. The required reserve ratio is 10%. a. What is the maximum amount that total deposits in the banking system could increase as a result of your initial deposit? Show your calculation. b. Explain the process by which the new money would be created. c. A wealthy customer at Big Bank A decides to make a large withdrawal, which results in Big Bank A having insufcient reserves. What can Big Bank A do in response to meet their reserve requirement? 8. What is monetary policy? What interest rate does the Fed traditionally target when it is conducting monetary policy? Explain carefully how an action (and which action) by the Fed ultimately leads to an increase in the interest rate. Use a graph to support your explanation