# Unit 7 Assignment: Money, Banks, and the Federal Reserve System

Unit 7 Assignment: Money, Banks, and the Federal Reserve System

Unit 7 [BU204]
Page 1 of 4
Unit 7 Assignment: Money, Banks, and the
Federal Reserve System
1. Your Assignment should have a cover sheet with the following information:
● Course Number
● Section Number
● Date
2. You may submit your Assignment using the Unit 7 Assignment template.
should also be in Standard English with correct spelling, punctuation, grammar, and style.
4. Respond to the questions in a thorough manner, providing specific examples of concepts, topics,
organized, logical, and focused.
Assignment
This Assignment deals with money, the Federal Reserve System, and the effects of money growth on
the rate of inflation. In this Assignment, assume you are hired as an assistant quantitative analyst at a
bank and one of your duties is calculating reserves and loans based on the total deposits in the bank.
Given the scenarios provided below, complete the tables and explain the computation results. This
Assignment requires a combination of short paragraph answers, computations, and completion of a
450-500 word essay.
This Assignment will assess your knowledge based on the following outcome:
BU204-4: Describe the roles of money, banking, and the Federal Reserve System in the macro
economy.
1) This section deals with increase in money supply given two scenarios (see “a” and “b” below). In
Westlandia, the public holds 50% of money one (M1) in the form of currency, and the required
reserve ratio is 20%.
a) Estimate how much the money supply will increase in response to a new cash deposit of \$500 by
completing the accompanying table and calculate the new total money supply.
(Hint: The first row shows that the bank must hold \$100 in minimum reserves — 20% of the \$500
deposit — against this deposit, leaving \$400 in excess reserves that can be loaned out. However,
since the public wants to hold 50% of the loan in currency, only \$400 × 0.5 = \$200 of the loan will be
deposited in round 2 from the loan granted in Round 1.)
Unit 7 [BU204]
Page 2 of 4
Round Deposits Required
reserves
Excess
reserves
Loans Loan proceeds
held as currency
Loan proceeds
deposited
1 \$500.00 \$100.00 \$400.00 \$400.00 \$200.00 \$200.00
2 \$200.00
3
4
5
6
7
8
9
10
Totals
b) Estimate how much the money supply will increase in response to a new cash deposit of \$500 by
completing the accompanying table and calculate the new total money supply. How does your
answer compare to an economy in which the total amount of the loan is deposited in the banking
system and the public does not hold any of the loans in currency? (Hint: Complete the table below
when none of the loan proceeds are held in currency following the example for row 1.)
Round Deposits
Required
reserves
Excess
reserves Loans
Loan proceeds
held as currency
Loan proceeds
deposited
1 \$500.00 \$100.00 \$400.00 \$400.00 0.00 \$400.00
2 \$400.00
3
4
5
6
7
8
9
10
Totals
Unit 7 [BU204]
Page 3 of 4
c) Calculate the Money Multiplier for question 1. a.) based on its computed change in money
supply, and calculate the Money Multiplier for question 1. b.) based on its computed change in
money supply. What does this imply about the relationship between the public’s desire for holding
currency and the money multiplier? Which scenario will contribute more to increase in money
supply?
2) Explain how each of the following situations changes 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
3) Assume that in a country the total holdings of banks were as follows:
Bank Amount in million dollars
Required Reserve \$45
Excess Reserve \$15
Deposits \$750
Loans \$600
Treasury Bonds \$90
a) Show that the balance sheet balances if these are the only assets and liabilities.
b) Assuming that people hold no currency, what happens to each of these values if the central bank
changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of
excess reserves, and banks do not change their holdings of Treasury bonds?
c) How much does the money supply change by?
4) Complete the following in 450-500 word essay. As an assistant quantitative analyst for this bank,
what can you assume from these results? What recommendations can you provide to your senior
manager on loan rates, depending on the Federal Reserve System’s ratio percentage? What
should the bank do when the Fed raises the discount rate and the Federal Funds Rate? What
should the bank do when the Fed increases and decreases the reserve ratio to change the reserve
requirement?
Before you submit your Assignment, you should save your work on your computer in a location and
with a name that you will remember. Make sure your Assignment is in the appropriate template
provided. Then, when you are ready, you may submit to the Dropbox.
Unit 7 [BU204]
Page 4 of 4
Unit 7 Assignment: Money, Banks, and the Federal Reserve
System
Points
Possible
Points
Earned
Content and Analysis
Problem # 1
Correctly completed table under (“a”).
6
Correctly completed table under (“b”). 6
Explained the relationship between the public’s desire for holding
currency and the money multiplier. (“c”)
4
Problem #2
Identified changes in money under scenarios. (“a–d”)
6
Problem #3
Balanced the balance sheet. (“a”)
5
Correctly calculated each value. (“b”) 6
Correctly calculated and explain the change in money supply. (“c”) 6
Problem #4
Recommended appropriate loan rates based on the reserve ratio.
Explained the actions of the banks when the Fed increases the discount
rate and the Federal Funds Rate. Described the actions of banks when
the Fed increases and decreases the reserve ratios.
6
Writing style, grammar, and APA formatting. 5
Total 50

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