ECN 135 Money and Banking
Sample Final Exam #B
Answer Key
Multiple Choice
1. D
2. C
3. C
4. B
5. A
6. B
7. C
8. D
9. B
10. D
11. C
12. A
13. C
14. B
15. C
16. A
17. B
18. B
19. C
20. D
21. D
22. A
23. A
24. A
25. B
26. B
27. C
28. B
29. A
30. A

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Written Questions (60 points total, 20 points per question)
Written Question #1 (20 points total)

Suppose the following T-accounts represent The Central Bank and The Regular Bank (billions of dollars). The Central Bank T-Account
Assets
Liabilities
Government $300B
Currency
$200B
Securities
in
Circulation
Reserves
$100B

a)

The Regular Bank T-Account
Assets
Liabilities
Reserves
$100B Checking $500B
Deposits
Government
Securities
Loans

$100B

Equity
Capital

$200B

$500B

Suppose the reserve requirement is 10%, calculate the money multiplier.

The currency ratio, c = 200/500 = 0.4, r = 0.10, and the excess reserve ratio, e = 50/500 = 0.1 (if the reserve requirement is 10%, this bank holds $50 B in excess reserves). The money multiplier is now m = (1 + 0.4)/(0.1 + 0.1 + 0.4) = (1.4)/(0.6) = 2.33
b)

Suppose The Regular Bank decided to no longer hold excess reserves. Draw new Taccounts showing one possible initial change from this. Calculate the money multiplier.

For my example, the bank then uses its $50 B in excess reserves to buy government securities from the Fed. (obviously not the only possibility)
The Central Bank T-Account
Assets
Liabilities
Government $250B
Currency
$200B
Securities
in
Circulation
Reserves
$50B

The Regular Bank T-Account
Assets
Liabilities
Reserves
$50B
Checking $500B
Deposits
Government $150B
Securities
Loans
$500B

The new money multiplier is m = (1 + 0.4)/(0.1 + 0 + 0.4) = (1.4)/(0.5) = 2.8

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Equity
Capital

$200B

c)

If The Central Bank decides to rent a helicopter and drop $50B in newly printed money on the population, what would happen to the money supply ultimately based on part a)?
What would happen based on part b)?

In part a), the money supply would increase by $50 B*2.33 = $116.5 B
In part b), the money supply would increase by $50 B*2.8 = $140 B

Written Question #2 (20 points total)
For each part, start by supposing the Federal Reserve current has a discount rate of 6% and the equilibrium federal funds rate is 5%, and the Fed pays 5% on excess reserves. Also, assume that there are currently $0B borrowed reserves.
a)

Using a supply and demand diagram show the effects of an open market purchase and briefly explain the effect on the federal funds rate, non-borrowed reserves, and borrowed reserves (up/down/stay the same). Be sure to label your diagram.

FFR
Reserve Supply
6%
5%

Reserve Demand

NBR

Reserves

The federal funds rate and borrowed reserves would stay the same. The amount of non-borrowed reserves increases.
b)

Using a supply and demand diagram show the effects of an decrease in the discount rate from 6% to 5.5% and briefly explain the effect on the federal funds rate, non-borrowed reserves, and borrowed reserves (up/down/stay the same). Be sure to label your diagram.

FFR
Reserve Supply
6%
5.5%
5%

Reserve Demand

NBR

Reserves

This has no effect on the federal funds rate, borrowed reserves, or non-borrowed reserves.

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c)

Using a supply and demand diagram show the effects of an decrease in the reserverequirement and briefly explain the effect on the federal