# Homework4

```Homework 4
Due at the beginning of class on April 18
Be sure to show all work (except question 5). Assignments can be typed out or hand-written or
some combination of the two, except where noted. Please bring a physical copy of all problems.
1. Read “King Andrew and the Bank” by Daniel Feller from the January/February 2008
Humanities magazine. Why was Andrew Jackson opposed to the Bank of the United States?
http://www.neh.gov/humanities/2008/januaryfebruary/feature/king-andrew-and-the-bank)
2. Suppose the federal funds rate is currently below the discount rate but greater than the interest
rate paid on reserves. If the Fed purchases government bonds from banks, what happens to the
federal funds rate and reserves? Use the market for reserves graph to support your answer (be
sure to label curves, equilibria, axes and shifts).
3. A friend argues that the Federal Reserve is undemocratic and congress should instead control
the money supply. What are two reasons why this might be a bad idea? Explain the reasoning
behind the arguments. Does empirical evidence suggest that your friend’s idea is a good or bad
idea? Why?
4. The currency in circulation in an economy is \$6 billion. Excess reserves are \$1 billion and
checkable deposits are \$10 billion. The required reserve ratio is 10%. What is the money
supply, the currency deposit ratio, and the money multiplier? If the central bank wants to
increase the money supply, what type of open market operation should be conducted? If the goal
of the operation is to increase the money supply by \$1 billion, how large should the open market
operation be (assume the ratios you calculated do not change with the operation)? Why?
5. Go to the St. Louis Fed’s FRED database and download data from January 1990 to January
2019 for Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves
(RESBALNS), and Required Reserves (RESBALREQ). Use Excel to plot the currency deposit
ratio, required reserve ratio, and excess reserve ratio from January 1990 to January 2019. What
trends do you notice? What does this mean for the money multiplier? (Hint: Be sure to adjust
data so they are all in the same units.) Please print out the graph along with your written answer.
You do not need to email the spreadsheet to me.
6. You own a bond that has a coupon rate of 4%, interest rate of 5%, face value of \$1,000, and
the time to maturity is 3 years. In a year, the interest rate of the bond falls to 2%. What is the
rate of return of the bond during the year?
```