Money and the Financial System"

Money and the Financial System"
In the scenarios, you take the role of a newly-hired assistant manager at a print shop, where you will help your boss discuss economic problems relating to the business, interpret economic graphs, and other tasks.
“Money and the Financial System” Please respond to the following:
From the scenario, describe the business implications of an increase in the required reserve ratio from 4% to 7%. Explain how that would affect the businesss strategic options.
Explain how the change in the required reserve ratio would influence the business price levels and consequently the price levels in the economy. Determine the impact the interest rate would have in relation to the copy center’s borrowing decision
ECO405 Week 8 Scenario Script: Economic Problems and Issues
Week 8 Scenario: Required Reserve Ratio
Slide #    Slide Title    Slide Narration
Scene 1    Introduction Page    Boss: I just came back from the bank and they recently raised the interest rates for new loans.  They are justifying the increase because of an increase in the Federal Required Reserve Ratio.
Scene 2        Employee: What does this have to do with our print shop?
Scene 3        Boss: When there is an increase in the Required Reserve Ratio, the liquidity at the banks decreases and they have less money to lend out. This results in banks increasing their interest rates to get the same returns on a smaller investment.
In other words, businesses will have to compete more for loans.
Scene 4    [DROP DOWN SELECT]    Employee: So there is [CHOOSE ANSWER] between interest rates and the required reserve ratio.
Scene 4.a    Response A    Employee: a Negative relationship
Boss: Incorrect.  An increase in the Required Reserve Ratio will result in an increase in the interest rates.  A negative relationship states that an increase in one item will cause a decrease in the other.
Scene 4.b    Response B    Employee: a Positive relationship
Boss: Correct.  An increase in the required reserve ratio will result in an increase in interest rates.
Scene 4.c    Response C    Employee: no connection
Boss: Incorrect: Banks’ money reserves and interest rates are directly connected, as we just discussed.
If banks are required to keep more money reserved on hand for withdrawals, they cannot lend out that money, which cuts down on their profits from interest.  They will increase the interest rates on new loans to make up the difference.
Scene 5        Boss: The impact doesn’t stop there. The increased interest rates directly impacts business costs, resulting in an increase in our price to customers.
Scene 6    [DROP DOWN SELECT]    Employee: So there is [CHOOSE ANSWER] between business costs and the Required Reserve Ratio.
Scene 6.a    Response A    Employee: a Negative relationship
Boss: Incorrect: an increase in the required reserve ratio will result in an increase in business costs, which is a positive relationship.
Scene 6.b    Response B    Employee: a Positive relationship
Boss: Correct.  An increase in the required reserve ratio will result in an increase in business costs.
Scene 6.c    Response C    Employee: no connection
Boss: Incorrect: Banks’ money reserves and interest rates are directly connected, which impacts the costs of all businesses that take out loans with a bank.
Scene 7        Employee: Why doesn’t the Federal Reserve keep the Required Reserve Ratio low so businesses and consumers can have more money to borrow?
Scene 8        Boss: If money is available in the economy in excessive amounts, then consumers will be willing to spend more money as they compete for items.  This means that overall prices will increase as a result.
Scene 9        Employee: So you are saying that a decrease in the Required Reserve Ratio will …
Scene 9.a    Response A    Employee: Indirectly cause an increase in the price level in the economy?
Boss: Correct.  A lower required reserve ratio creates an increase in liquidity, which causes an increase in demand, as everyone has more borrowed money to spend. The increase in demand causes an increase in price levels.
It also directly causes a decrease in the cost of the business through lower interest rates.
Scene 9.b    Response B    Employee: Directly cause a decrease in the cost of the business?
Boss: Correct.  A decrease in the Required Reserve Ratio means there is a decrease in the cost to the business because there is a decrease in interest rates.
However, it does indirectly cause an increase in the economy’s price level, as an increase in liquidity increases consumer demand.
Scene 10    SHOW CHART A    Boss: I got this graph from the bank.  Let’s take a look at it and see how the Required Reserve Ratio is connected with interest rates and price levels.
Scene 11        Boss: Assume the current level of the money supply is MS. The Federal Reserve increases the Required Reserve Ratio. This will result in:
Scene 11.a    Response A    Employee: A shift in the money supply from MS to MS1.
Boss: That’s incorrect. An increase in the required reserve means that banks are required to hold more money in reserve.
Scene 11.b    Response B    Employee: A shift in the money supply from MS to MS2.
Boss: That’s correct. An increase in the required reserve means that less money is available to be given in loans, and there will less money in the economy.
Scene 11.c    Response C    Employee: No change in the money supply.
Boss: That’s incorrect.  We have established that the required reserve ratio and the money supply are directly connected, and a change in the one will change the other.
Scene 12        Boss: The change in the money supply will result in interest rates increasing by…
Scene 12.a    Response A    Employee: A change of 1%
Boss: That’s correct.  The interest rates would change from seven percent to eight percent, which is an increase of one percent.
Scene 12.b    Response B    Employee: A change of 8%
Boss: That’s incorrect.  Remember, you are reporting the change, not the total.
Scene 12.c    Response C    Employee: A change of 4%
Boss: That’s incorrect.  Remember, you are reporting the change that occurs from the original money supply at MS to the new money supply after the increase of the Required Reserve Ratio.
Scene 13    SHOW CHART B    Boss:   Here’s our company’s supply and demand chart.  The increase in the interest rates will cause …
Scene 13.a    Response A    Employee: An increase in the cost to the business.
Boss: That’s correct.  The business will have to pay extra interest on its loans due to the higher rates.
Even if we had no debt, our suppliers probably do, and the change of required interest will affect our supply chain costs.
Scene 13.b    Response B    Employee: A decrease in the cost of business.
Boss: That’s incorrect.  Remember that earlier we established that there is a positive relationship between business costs and the Required Reserve Ratio.
Scene 13.c    Response C    Employee: No change to the cost of business.
Boss: That’s incorrect.  A change in the amount of interest required on the business’ loans is something that has to be accounted for in the business costs.
Scene 14        Boss: The increase in our business costs will cause …
Scene 14.a    Response A    Employee: A shift in the supply line to the left, with an increase of price to P2.
Boss: That’s correct.  A leftward shift of the supply curve represents a decrease in our ability to supply at a given price, or an increase in cost for a given quantity.
Scene 14.b    Response B    Employee: A shift in the supply line to the right, with a decrease in price to P1.
Boss: Incorrect.  A rightward shift of the supply curve represents an increase of our ability to supply at a given price, or a decrease in cost for a given quantity.  This is not true if we have an increase in business costs.
Scene 14.c
Response C    Employee: A shift of the demand curve to the left, causing prices to drop to P1.
Boss: That’s incorrect.  An increase of our costs changes our ability to supply, which only shifts our supply curve.  The quantity demanded will change to the new equilibrium, but the demand curve will not shift.
Scene 14.d
Response D    Employee: No change to the graph.
Boss: That’s incorrect.  A change in cost will cause a shift on the graph.
Scene 15    Conclusion    Boss: The Required Reserve Ratio is a far-reaching policy that affects almost everything in the economy. The amount of money it allows to flow will either raise or lower the general price level, and if regulated well, keeps the boom and bust cycle less extreme and the economy more stable.
Thanks for your help in analyzing how the Federal Reserve’s decisions affect our business.
GRAPH A
GRAPH B