SHORT ESSAY QUESTIONS Bank Balance Sheet Cash Reserves Loans Investments

| November 24, 2016

SHORT ESSAY QUESTIONS
Bank Balance Sheet
Cash
Reserves
Loans
Investments

$500,000
$700,000
$6,800,000
$7,000,000

Deposits
Short Term Debt
Long-term Debt

$7,000,000
$3,000,000
$3,000,000

3. Use the above balance sheet to complete the following questions:
(a) How leveraged is this bank? What danger does that present?
(b) Suppose the bank’s customers want to withdraw $3 million worth of deposits due to rumors of an in-house accounting scandal. Will the bank be able to honor those requests?
(c) What situation is the bank now facing, and what four options could it pursue?
4. In 2008, aggregate demand fell due to the housing bubble while aggregate supply declined
due to rising commodity prices.
(a) Assuming an initial medium-run equilibrium, show the effects of these two events in
the AS/AD model. Label the initial medium-run equilibrium as 0 and the new mediumrun equilibrium as 1. Be sure to state the change in output, unemployment, the price
level, and the inflation rate, or note if these changes are ambiguous.
(b) Suppose the Fed targets the natural rate of unemployment. What action would it take?
Show the result of its policy on your graph. Label the new equilibrium 2.
(c) Why might the Fed not target the natural rate of unemployment?

3

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