Econ 102 Written Questions

Question 1:
Utilize the attached balance sheets to answer the following questions:
A: Given the current state of their balance sheet, what problem(s) is Bank of America dealing with? (Write at least two sentences.)
B: Suppose that a customer at Bank of America demands that $280,000 be transferred to a competing commercial bank because the competing commercial bank is offering higher deposit rates. What difficulty is Bank of America now dealing with and why are they dealing with this issue? Detail at least one way Bank of America can alleviate this problem. (Write an explanation in at least one paragraph.)
C: Suppose that Bank of America goes to the Federal Reserve for a Discount Window Loan in the amount of $240,000. Which obstacle has been alleviated at Bank of America? Why has it been alleviated? (Write at least two sentences. In addition, make sure that you detail the accounting entries on both balance sheets and submit an image your entries.)
D: Which issue at Bank of America still remains even after the bank took out the Discount Window Loan? Why is Bank of America still dealing with this issue? (Write at least two sentences.)
E: What actions could the Federal Reserve take to solve Bank of America’s problem. Describe these actions and how they would affect Bank of America’s balance sheet. (Write at least one paragraph. In addition, make sure that you detail the accounting entries on both balance sheets and submit an image your entries).
Questions 2:
Current inflation: 4%
Fed’s inflation target: 2%
Deviation of aggregate output from potential output: ( ) 3%
Answer the following questions by utilizing the information above:
A. Given the information provided, what should the Federal Funds Rate be according to the Taylor Rule? (Submit an image of your calculations
B. Given that current inflation is greater than the Fed’s target rate of inflation, does the Taylor Rule state that the Federal Funds Rate should be lowered or raised when calculating the appropriate Federal Funds Rate according to the Taylor Rule? Using economic logic, explain why the Taylor Rule is stating that the Federal Funds rate needs to be lowered or raised when calculating the appropriate Federal Funds Rate according to the Taylor Rule. (Provide at least 1 paragraph for full credit.)
C. Given that the deviation of aggregate output from potential output is ( ) 3%, does the Taylor Rule state that the Federal Funds rate needs to be lowered or raised when calculating the appropriate Federal Funds Rate according to the Taylor Rule? Using economic logic, explain why the Taylor Rule is stating that the Federal Funds rate needs to be lowered or raised when calculating the appropriate Federal Funds Rate according to the Taylor Rule. (Provide at least 1 paragraph for full credit.)
D. Suppose that the current Federal Funds Rate is 2%. Given your answer to question 1, should the Fed purchase or sell assets? Explain and detail how this will impact the Federal Funds Rate. (Provide at least 1 paragraph for full credit.)
Question 3:
Here is the following scenario for a 1 year investment:
Purchase stock: $101
Equity invested: $73
Debt: $27
Interest Rate: 10%
Sales price after 1 year: $157
Answer the following questions (Show your calculations for full credit):
A. What is the leverage ratio? (Type in your answer and submit an image of your calculations.)
B. What is the rate of return for the year? (Type in your answer and submit an image of your calculations into.)
C. If the leverage ratio were to increase would the rate of return for the year increase or decrease? Explain from a mathematical or arithmetical view why this is the case? (Provide at least 1 paragraph for full credit.) (You do not have to provide calculations for full credit.)
D. If asset prices declined and the sales price were to decline over the period to $30, assuming everything else remains the same from the scenario described above, what would the rate of return be? (Type in your answer and submit an image of your calculations)
E. Suppose that the leverage ratio were to increase, given a sales price of $30 and assuming everything else remains the same from the scenario described above, would the rate of return decline or increase? Explain from a mathematical or arithmetical view why this is the case? (Provide at least 1 paragraph for full credit.) (You do not have to provide calculations for full credit.)
F. How can leverage amplify and deflate asset bubbles? How can leverage impact the “real” economy? (Provide at least 2 paragraphs for full credit.)