Money and Banking - Valpo Bank - Assignment Example

2. Suppose that the bond market, the loanable funds market, and the money market are all in equilibrium. How will equilibrium be restored in the three markets if nominal GDP falls? Hint: How is the demand for money affected? Explain the chain of events that lead to simultaneous equilibrium in the three markets. A fall in nominal GDP will lead to a decrease in the level of money demand resulting in a downward shift of the money demand curve. A fall in nominal GDP will lead to an increase in interest rates in the bond market. This will trigger a shift in the demand curve in the bond market to the right resulting in a new equilibrium level e2. A fall in nominal GDP will lead to a decrease in interest rates in the loanable funds market. This will trigger a shift in the demand curve in the bond market to the left resulting in a new equilibrium.

3. What is the present value of a bond that pays $265 annually for three years if the annual interest rate is fixed at 3.5%?

Present value of a bond
PV = PMT * [1-(1+i)-n/i]
PV = 265*[1-(1+0.035)-3/0.035]
PV= 265*54.34
PV= 14400.41

4. For each transaction below, indicate the appropriate change to the balance sheet of the Valpo bank. Include all assets and liabilities/net worth in each step.

If the required reserve ratio is 20%, is the Valpo Bank meeting its reserve requirement? How do you know?

Valpo will be able to meet its reserve requirement since the amount deposited in the reserve bank is above the 20% mark.

If the bank is holding excess reserves, what might it do with them? If the bank is short of its reserve requirement, what might it do to meet that requirement?

The bank can lend out the excess reserve to borrowers. On the other hand, if the bank is short of reserves then it can borrow from the public by issuing its short-term securities. Read More