Current Economic Analysis
Week 7: Personal Assignment
There are Internet questions with this assignment at the end.
You have just inherited $100,000 from your rich uncle Sam. Being the conservative sort, you rush to your local bank and deposit the entire windfall. The reserve requirement is currently 10 percent. What is the immediate impact on the balance sheet of the bank?
Reserve Account = 10% * 100,000 = $ 10,000
Cash Account = $ 100,000- $10,000 = $ 90,000
Liability account = $ 100,000
Mention each account affected and the appropriate amount. The Reserve account of the company is increased by $ 10,000; cash account of the bank is increase by $ 90,000, while the liability of $ …show more content…
Now if the fed reduces its lending to banks at the discount window, again bank reserves will fall and deposits will fall will also result in a decline in the money supply. Finally, raising legal reserve requirements does not reduce bank reserves, however by raising the reserve/deposit ratio this action reduces the amount of deposits that banks can hold, this will result in deposits and the money supply declining.
Explain as thoroughly as you are able, the mechanism that causes a shrinking money supply to result in a change in interest rates.
A shrinking money supply is caused by a disequilibrium in the money market, where money demand is greater than money supply. As spending decreases, less money will be seen flowing throughout the economy. So we have a decrease in the money supply. This is referred to the market mechanism, which will change in the interest rates. The interest rates will increase to reflect the market mechanism of creating a greater incentive for consumers to by assets. This will intern lead to the money demand decreasing to match the lower money supply.
Go to the St. Louis Fed website and complete the following assignment. Scroll down and select M1 Money Stock. I want you to report the Monthly “Not Seasonally Adjusted” data for the most recent month and for January,