In this Assignment, you will compute the required reserves and excess reserves using bank deposit data. You will also analyze the impacts of fiscal policy and monetary policy on the economy.
Instructions: This Assignment presents scenarios in which you will examine the effects of fiscal and monetary policy on the U.S. economy. It requires a combination of short paragraph answers, computations, and completion of a 450–500 word essay. Answer all of the following questions in this document. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.
In this Assignment, you will be assessed on the following outcome:
MT445-5: Examine how fiscal and monetary policies affect the U.S. economy.
1. Explain whether each of the following is counted in the M1 measure of the money supply:
i. The coins in your piggy bank.
ii. The funds in your checking account at First National Bank.
iii. The funds in your savings account at Second National Bank.
iv. The traveler’s check you have left over from your trip to Germany.
v. The available balance on your American Express card.
2. Refer to the simplified balance sheet for a bank and answer the following questions.
Reserves $10,000 Deposits $70,000
Loans $66,000 Stockholder’s equity $6,000
a. If the required reserve ratio is 5%, how much in excess reserves does this bank hold? Show your work.
b. What is the maximum amount this bank can expand on its loans? Show your work.
c. What will happen to the M1 money supply if it makes the loans under (b) above and those funds are deposited into another bank by the borrowers?
3. Using a-d below, identify and explain each of the following events as:
a) part of an expansionary fiscal policy
b) part of a contractionary fiscal policy
c) part of an expansionary monetary policy
d) part of a contractionary monetary policy
i. The corporate income tax rate is increased.
ii. Defense spending is increased.
iii. Families are allowed to deduct all daycare expenses from their federal income taxes.
iv. The Federal Reserve Bank sells Treasury securities.
v. The Federal Reserve Bank buys Treasury securities.
4. Answer the following questions in a 450–500 word essay.
Assume the Federal government runs a budget deficit in the current fiscal year.
i. Should the government always be required to balance the budget? Explain why and include the pros and cons.
ii. How can the Federal government fund (finance) the budget deficit?
iii. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what will happen to the level of national debt, all other factors held constant?
iv. Assuming the Federal government and firms compete for the same savers’ dollars in the loanable funds market, what will likely happen to interest rates?
v. Given your answer under (ii and iii) above, is crowding out more or less likely to occur if the deficit is funded by Treasury securities?
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