Suppose a computer virus disables the nation's automatic teller machines, making withdrawals from the bank accounts...

Suppose a computer virus disables the nation's automatic teller machines, making withdrawals from the bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money.

a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate? What happens to aggregate demand?

b. If instead the Fed wants to stabilize aggregate demand, how should it change the money supply?

c. If it wants to accomplish this change in the money supply using open-market operations, what should it do?

Expert Solution

a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate? What happens to aggregate demand?

According to the theory of liquidity preferences, Rate of interest is demand by the supply of and demand for money. The rate of interest on the demand side is governed by the liquidity preference of the community arises due to the necessity of keeping cash for meeting certain requirements. Hence, if making withdrawals from bank accounts less convenient, Money demand will increase shifting the money demand curve upwards. With supply constant, Interest rate will increase to maintain equilibrium in the money market.

b. If instead the Fed wants to stabilize aggregate demand, how should it change the money supply?

If the Fed wants to stabilize aggregate demand, it should increase money supply. This brings rate of interest back open market operation is the method of buying or selling government securities in the market. When the Fed restore to the method of open market operations, it will increase the money supply by buying government securities in the market. When the government buys securities or bonds, money is transferred from the government to the hands of the public increasing supply of money.

c. If it wants to accomplish this change in the money supply using open-market operations, what should it do?

In this case, there will be a shortage of money and the aggregate demand will go up. With this increase in demand, the FED will lower the interest rates to reduce the amount of people from borrowing money. This will eventually result in the economy moving back to equilibrium where the quantity of money supplied meets the quantity demanded.

Rahul Sunny answered 7 months ago

The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines...

The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $134,400 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $28,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1.Compute the payback period...

Commercial Bank and Trust Company is studying the use of its automatic teller machines (ATMs). Of...

Commercial Bank and Trust Company is studying the use of its automatic teller machines (ATMs). Of particular interest is whether young adults (under 25 years) use the machines more than senior citizens. To investigate further, samples of customers under 25 years of age and customers over 60 years of age were selected. The number of ATM transactions last month was determined for each selected individual, and the results are shown below. Under 25 10 10 11 15 7 11 10...

The National Bank, like most other large banks, found that using automatic teller machines (ATMs) reduces...

The National Bank, like most other large banks, found that using automatic teller machines (ATMs) reduces the cost of routine bank transactions. National installed an ATM in the corporate offices of the Fun Toy Company. The ATM is for the exclusive use of Fun's 595 employees. After several months of operation, a sample of 100 employees revealed the following use of the ATM machine by Fun employees in a month: Number of Times ATM Used Frequency 0 15 1 20...

At Acme Bank the total amount of money that customers withdraw from an automatic teller machine...

At Acme Bank the total amount of money that customers withdraw from an automatic teller machine (ATM) each day is believed to be normally distributed with a mean of $8600 and a variance of 6250000. i) At the beginning of weekday (M-F), the Acme Bank puts $10000 into the automatic teller machine. What is the probability that the ATM becomes empty before the end of the day. ii) How much should the Acme Bank put in the ATM each day...

Consider an automatic bank machine, known as Automatic Teller Machine (ATM), and a customer who wishes...

Consider an automatic bank machine, known as Automatic Teller Machine (ATM), and a customer who wishes to withdraw some cash from his or her banking account. Draw a UML system sequence diagram to represent this use case.

The computer that controls a bank's automatic teller machine crashes a mean of 0.6 times per...

The computer that controls a bank's automatic teller machine crashes a mean of 0.6 times per day. What is the probability that, in any seven-day week, the computer will crash less than 3 times? Round your answer to four decimal places.

The computer that controls a bank's automatic teller machine crashes a mean of 0.4 0.4 times...

The computer that controls a bank's automatic teller machine crashes a mean of 0.4 0.4 times per day. What is the probability that, in any seven-day week, the computer will crash less than 4 4 times? Round your answer to four decimal places.

Activity-Based Costing in a Service Organization Banctronics Inc. has ten automatic teller machines (ATMs) spread throughout...

Activity-Based Costing in a Service Organization Banctronics Inc. has ten automatic teller machines (ATMs) spread throughout the city maintained by the ATM Department. You have been assigned the task of determining the cost of operating each machine. Management will use the information you develop, along with other information pertaining to the vol- ume and type of transactions at each machine, to evaluate the desirability of continuing to operate each machine and/or changing security arrangements for a particular machine. The ATM...

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines.

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.5 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities.ActivityCost Driver CostDriver VolumeUsing ATMNumber of uses$1,500,000 2,000,000usesVisiting branchNumber of visits 900,000 150,000visitsProcessing transactionNumber...

Suppose you wish to make 28 regular annual withdrawals from your bank account for the next...

Suppose you wish to make 28 regular annual withdrawals from your bank account for the next 28 years. All the withdrawals will be of the amount of $1,543. You plan to make the first withdrawal a year from now, the second one two year from now, the third one three years from now, and so on. In order to make these withdrawals possible, what is the least amount of money that you need to have in the account right now?...

Question