Whitman College Econ 407 Exam 2 November 8, 1996 Write all answers in your blue book. Show all of your work. 1. (a) (2pts) Define a bank. (b) (3pts) Define an illiquid bank. (c) (30pts) Describe liquidity management techniques available to fractional reserve banks in the US. 2. (30pts) Describe the reforms instituted in response to the S&L crisis, designed to prevent it from happening again. 3. Consider the following model. The banking industry holds one kind of deposit, a transactions deposit. The money supply is defined to be currency in the hands of the public (C) plus deposits (D). The monetary base is currency in the hands of the public plus reserves (R) in the banking industry. Assume that the public holds some currency and that banks hold some excess reserves (ER). Let r be the required reserve ratio on deposits. (a) (5pts) Define and derive the money multiplier. Suppose the currency to deposit ratio is 0.1, the excess reserves to deposit ratio is 0.04, and the required reserve ratio is 0.08. (b) (5pts) Solve for the money multiplier. (c) (5pts) Describe an open market operation that would cause the money supply to ultimately rise by 10 million dollars. (d) (5pts) Describe an open market operation that would cause the money supply to ultimately fall by 20 million dollars. (e) (5pts) If the Fed were to sell 2 million dollars of government Treasury bills, what would ultimately happen to the money supply?(f) (5pts) If the Fed were to lend 6 million dollars through the discount window, what would ultimately happen to the money supply? (g) (5pts) Describe what would happen to the money supply if the Fed raised the requiredreserve ratio to
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