Homework Rubric (2)Homework Rubric (2)标准等级得分此标准已链接至学习结果Homework CreditThese are the possible scores on the homework assignment5.0 得分Full CreditHomework is complete and without error or with one or two minor mistakes.4.0 得分Standard CreditHomework is complete but with some errors such as a three or more minor errors or a couple major errors.3.0 得分Some CreditHomework is incomplete such as parts of questions not attempted or is complete but contains numerous major errors.0.0 得分No CreditHomework is not turned in or is turned in late5.0 分总得分： 5.0 ，满分 5.0
ecn_135_hm3_w19__2_.pdf
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ECN 135 Winter 2019
Instructor: Derek Stimel
Homework #3
Due Friday March 15 by 5 PM in Canvas
Assignment must be uploaded to Canvas as a pdf file or MS Word.
It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.)
Also, scan must be a single file (no multiple documents or files).
1)
The following are balance sheet items for two entities: the Central Bank and A Commercial
Bank.
Central Bank: Discount Loans $42, Currency $72, Government Securities $66,
Bank Capital: $12, and Reserves $24
Commercial Bank:
Checkable Deposits $120, Government Securities $96,
Loans $60, Bank Capital $18, Reserves $24, Borrowings (from Central
Bank) $42
The reserve requirement is 15%.
a)
Build a Balance Sheet for each bank. If the Central Bank buys $3 in securities to the
Commercial Bank, explain in words what happens to each balance sheet category
initially.
b)
Calculate the effect of the Central Bank buying $3 in securities on the money supply.
[Note: we use the initial numbers to do the money multiplier calculation.]
c)
Is there an alternative way the Central Bank could achieve the same effect on the money
supply as in part b)? If so, provide an example, if not, briefly explain why not.
2)
For each of the following, draw a supply and demand diagram for the overnight interest
rate. Also, provide a brief written explanation of your answer and what will happen to
the overnight interest rate, non-borrowed reserves, and total reserves.
a)
Currently the equilibrium overnight rate is 8% and there is $0 in borrowed reserves, $20
in total reserves. The rate the Central Bank charges for overnight loans is 10% and pays
8% for reserves. Show what will happen if the economy booms.
b)
Currently the equilibrium overnight rate is 6% and there is $0 in borrowed reserves, $20
in total reserves. The rate the Central Bank charges for overnight loans is 6% and it pays
6% on reserves. Show what will happen if the Fed sells $2 in bonds to banks.
c)
Currently the equilibrium overnight rate is 8% and there is $10 in borrowed reserves, and
$20 in total reserves. The rate the Central Bank charges for overnight loans is 8%. The
Central Bank also pays 6% on any deposits banks keep at the Central Bank. Show what
happens if they lower the rate the Central Bank charges for overnight loans to 7%.
Page 1 of 3
For Questions 3) and 4). True/False Explain Questions: For each statement, state whether you
believe the statement is true or false. Provide a brief explanation of your reasoning.
3)
a)
b)
c)
4)
a)
b)
c)
If the Federal Reserve commits to money supply growth of 2% per year, then the
economy enters recession, it would be time consistent to keep the growth rate at 2%.
If households decide to deposit a larger portion of their cash in bank checking accounts,
this has no immediate effect on the money supply (M1).
If households decide to deposit a larger portion of their cash in bank checking accounts,
this has no effect on the money supply (M1) over time.
The ability of the Federal Reserve to set the federal funds rate is a good example of
instrument independence.
When setting monetary policy, the Federal Open Market Committee targets short-term
interest rates
Countries that use inflation targeting attempt to lower inflation expectations.
5)
Quick Answers. For each of the following you only need to provide a one or two-word response (choose
one of the underlined phrases for each statement).
a)
Historically in the United States northern interests typically did or did not support the
Second Bank of the United States.
b)
According the political business cycle theory, there would be a tendency to
increase/decrease the money supply after an election.
c)
All else the same, a decrease in Treasury deposits to the Fed will increase/decrease the
monetary base.
d)
Over the course of 1931-1934, the currency ratio in the United States
increased/decreased.
e)
Targeting non-borrowed reserves/federal funds rate will tend to increase the volatility of
interest rates in the economy.
f)
Open market operations to change the amount of non-borrowed reserves in the system is
an example of a defensive/dynamic open market operation.
g)
If inflation becomes less sensitive to changes in the output gap, this likely means that beta
is higher/lower.
h)
Implementing inflation targeting is thought to increase/decrease the transparency of the
Central Bank.
Page 2 of 3
6)
Let’s try to understand the long-run and short-run implications of monetary policy issues. Let’s
assume inflation is currently 2% and that monetary policy has an inflation targeting rule that
makes desired (targeted) inflation also 2%. Finally suppose the equilibrium real interest rate in
the economy is 1% and that “beta” in the Phillips curve is 1.2.
a)
In the long-run, the output gap should be 0% and there should be no shocks to inflation. In that
situation what will be inflation expectations, the inflation gap, and what will be the targeted
federal funds rate? [Hint: use the Phillips curve and Taylor rule.]
Now suppose it is the short-run and the output gap is 2%, based on the Phillips curve, what would
be the inflation rate now?
With the output gap at 2% and your answer for the inflation rate from part b), what is the federal
funds rate target according to the Taylor rule?
Suppose that in the marketplace the actual federal funds rate is 3%, what would Professor Taylor
say about this rate compared to what you calculated in part c).
b)
c)
d)
7)
a)
b)
c)
For each statement, state whether you believe the statement is true or false. Provide a brief
explanation of your reasoning.
If the money supply decreases, household spending on non-durable goods will increase.
If the money supply decreases, adverse selection problems in bank lending will decrease.
If the money supply decreases, mergers and acquisitions will increase.
Page 3 of 3
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