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Group Exercise Global Economics

Both the assets of the central bank and the liabilities will be benefited. B) The Central Bank raises the required reserves ratio. The change in the reserves ratio will affect the bank credits, will reduce the volume of the deposits that are supported by the reserves and this will reduce the monetary base by raising the cost of the credits and loan interests making it less accessible to the public. C) The Central Bank decreases the discount rate and banks respond by borrowing from the Central Bank.

According to the easy monetary policy, when the central bank educes its discount rate, the interest rate in the currency in circulation and bonds markets will go down. Therefore People will be more interested in getting a loan from the bank as it is going to be easier to make profits. D) The Central Bank buys foreign currency from a domestic foreign exchange dealer. The country makes many trades in the international market, therefore instead of fixing their exchange rate they decide to buy or sell foreign currency, by doing this the money supply will increase because of the exchange reserves and this could create inflation. There are rumors about a computer virus attack

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on Atoms and people retrieve cash from the Atoms. The virus can have access to the information of account holders as pin numbers and amount of money. This action wont affect the monetary base nor the money multiplier but the money supply may increase as peoples financial identity may be stolen and used for online transactions, purchases and other movements in account holders. 2. (20 points) From 2007 to 20011 the U. S. Monetary base increased by 200 percent, but MI and MM increased by 40 percent and 25 recent respectively.

What caused this explosion in the monetary base? Why didn’t MI and MM increase by the same percentage as the monetary base? 3. (25 points) It is estimated that the U. S. Financial crisis of 2008 led to a loss of $7 trillion in the real estate industry due to the decline in housing prices. The stock market decline brought another $1 1 trillion in losses, and retirement accounts lost $3. 4 trillion. Describe the effect of these losses on the Real Alienable Funds market: a) to the supply of real alienable funds? Why? What will happen to the equilibrium real risk-free interest rate? Explain and graph your answers. 4. (25 points) The United States federal budget deficit fell to $1. 1 trillion in the 2012 fiscal year, down from about $1. 3 trillion a year earlier. Describe the effect of this fall in the deficit on the real alienable funds market: What will happen to the demand for real alienable funds? Why? What will happen to the supply of real alienable funds? Why? What will happen to the equilibrium real risk-free interest rate? Explain and graph your answers

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