Gallaway
ECO 305

Homework #3

All homework is to be typed. Hand-written graphs and equations are acceptable as long as they are neat.  (Show all work!)

  1. Explain the role of moral hazard in the Savings and Loan debacle of the 1980s.
  2. Who serves on the board of governors? (Name names)
  3. What mechanisms are in place to promote the Federal Reserve System's independence?  Why are these measures there?  What are the possible criticisms of the Fed's independence?
  4. Assume $1 million fell from outer space and that the reserve requirement is 5%.  Use T-accounts to illustrate how the banking system could use this money to create even more money.  Show two rounds of money creation, explain each step.  What is the largest increase that this money could possibly have on the money supply?  Why might the actual impact be smaller?
  5. If the currency ratio is 50%, the required reserve ratio is 5%, and the desired excess reserve ratio is 1%, calculate the money multiplier for M1. (show formula and work).  What would happen to the multiplier if the currency ratio increased?  Why? What factors might cause an increase in the currency ratio.
  6. Use T-accounts to show how a Fed purchase of  $800 million in US government securities, from the banking system, would affect bank reserves and the monetary base.