ECO121 Macroeconomics

Class: IB1602
Handed out:
Submission due:
Format:
Submission mode:
Email to:

STUDENT INFORMATION

Name: Nguyễn Diệu Tú Roll HS150490

number:

Room No: Class: IB1602

FOR TEACHER ONLY

MARK MARKED BY
(NAME AND SIGNATURE)

Signature of Proctor

Individual Assignment 02
1. Explain how the Federal Reserve can use open market operations to change the level of bank
reserves. How does a change in reserves affect the money supply? (Give answers for both an
increase and a decrease in the money supply.)
1/2
 Answers:
● The Federal Reserve can use open market operations to change the level of bank reserves.
Because the Fed's primary tool is the open-market operation, purchase and sale of U.S
government bonds.
● A change in reserves affects the money supply is:
*Increasing money supply, the Fed creates dollars and uses them to buy government bonds from the
public in the bond markets, paying with new dollars.
* Decreasing money supply, Fed sells bonds from its portfolio to the public in the nation’s bond
markets, taking dollars out of the circulation.

2. Suppose that the money supply is $1 trillion. Decision makers at the Federal Reserve decide that
they wish to reduce the money supply by $100 billion, or by 10 percent. If the required reserve ratio is
0.05, what does the Fed need to do to carry out the planned reduction?
Answers:
R=5%
Money multiplier = 1/R= 1/5%= 20
Assume X of reserves creates $100 billion of money => X * 20 = $100 billion
According the tools of monetary control, Open-Market Operation, to decrease money supply, Fed sells
bonds from its portfolio to the public in the nation’s bond markets, taking dollars out of the circulation.
 X * 20 = - $100 billion
 X = - 5 billion
The Fed must take $5 billion in reserves out of the banking system. It can do this by selling $5
billion in government bonds to the public

3. Would each of the following transactions be included in net exports or net capital outflow? Be sure
to say whether it would represent an increase or a decrease in that variable.
a. An American buys a Sony TV.
b. An American buys a share of Sony stock.
c. The Sony pension fund buys a bond from the U.S. Treasury.
d. A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer.
● NX = Exports - Imports
● Net capital outflow = Purchased of foreign assets by domestic residents - Purchase of domestic
assets by foreigners

a, An American buys a Sony TV: Net exports would decrease because Sony TV is foreign product => Imports
increase. So net exports would decrease.

b, An American buys a share of Sony stock: Net capital outflow would increase here as this American is
inventing in a foreign nation’s company.
2/2
c, The Sony pension fund buys a bond from the U.S. Treasury: Net capital outflow would decrease here as
this is a foreign investor purchasing a domestic asset. Capital is flowing into the nation instead of out

d, Worker at a Sony plant in Japan buys some Georgia peaches from an American farmer: Net exports
would increase, because the U.S is exporting these Georgia peaches to a foreign buyer.

3/2