MINISTRY OF EDUCATION AND TRAINING FINAL EXAM

NATIONAL ECONOMICS UNIVERSITY

Version: ..1..

Question 1. ( 3 points)

The following assumptions are made: The required reserve ratio on checkable deposits is 10%,
banks do not hold any excess reserves, and the public’s holdings of currency do not change.
Suppose the Fed buys $5 million of bonds from the First National Bank. If the First National
Bank and all other banks use the resulting increase in reserves to purchase securities only and not
to make loans, what will happen to checkable deposits? Use T-account to illustrate your answer.

Question 2. (2 points)
What happens to reserves at the First National Bank if one person withdraws $1,100 of cash and
another deposits $200 of cash? Use T-accounts to explain your answer.

Question 3. ( 3 points)
Define federal funds, federal funds market, and federal funds rate. Who sets the federal funds
rate? Explain how the federal funds market facilitates bank operations.
Explain and draw figures on how each tool of monetary policy affects the overnight loan rate
(Fed rate) in banking system.

Question 4. (2 points)
Why has the development of overnight loan markets made banks more likely to hold fewer
excess reserves? Why might a bank be willing to borrow funds from other banks at a higher rate
than it can borrow from the Fed?

Note: Closed book exam, 1 A4 handwritten page key terms and formula sheet is allowed.