Consider the following situation in the Canadian banking system: •The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. •The dealer deposits this cheque at Bank XYZ, a commercial bank. •The target reserve ratio for all commercial banks is 20%. •All commercial banks operate with no excess reserves. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million

Consider the following situation in the Canadian banking system: •The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. •The dealer deposits this cheque at Bank XYZ, a commercial bank. •The target reserve ratio for all commercial banks is 20%. •All commercial banks operate with no excess reserves. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter25: Money, Banking, And The Federal Reserve System

Section: Chapter Questions

Problem 16P

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Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $3 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. • The dealer deposits this cheque at Bank XYZ, a commercial bank. The target reserve ratio for all banks is 30 percent. • All commercial banks operate with no excess reserves. .There is no cash drain. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the fourth-generation banks will be able to expand their loans by OA. $0.50 million. B. $0.72 million.. C. $0.58 million. D. $0.86 million. OE. $1.08 million. OOO
One of the major functions of commercial banks is credit creation. Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. Commercial banks have to maintain a specified percentage of their deposits as liquidity which is set by the central bank. This reserve requirement controls the extent to which commercial banks can grow money in the economy. Assuming you only have one commercial bank in your economy, a reserve requirement of 20% and an initial deposit of 200. REQUIRED: A. Show for the first four days and the last day the balance sheet of your commercial bank.
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 20%. Charles, a Southeast Mutual Bank customer, deposits $1,500,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves (Dollars) (Dollars) 1,500,000 Liabilities Change in Required Reserves (Dollars) Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Ana, who immediately uses the funds to write a check to Yakov. Yakov deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of…
Suppose bank A, which faces a reserve requirement of 10 percent, receives a $1000 cash deposit from a customer. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank A’s balance sheet. Assuming that the loan shown in Bank A’s balance sheet is redeposited in Bank B, show the changes in Bank’s balance sheet if it lends out the maximum possible. Repeat this process for three additional banks: C, D and E. Using the simple money multiplier, calculate the total change in the money supply resulting from the $1000 initial deposit. Assume that Banks A, B, C, D and E each wish to hold 5 percent excess reserves. How would holding this level of excess reserves affect the total change in the money supply?
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 10%. Eric, a Southeast Mutual Bank customer, deposits $250,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 250,000 Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Cho, who immediately uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking…
10. Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. • The dealer deposits this cheque at Bank XYZ, a commercial bank. • The target reserve ratio for all commercial banks is 20%. • All commercial banks operate with no excess reserves. • There is no cash drain. The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is $25 million. $15 million. $22.5 million. $5 million. $20 million.
Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves. Assets Liabilities and Net Worth (Billions of Dollars) Total reserves 5 Checkable deposits 50 Loans 25 Securities 20 Total 50 Total 50 What is the required reserve ratio? 25% 40% 5% 10% Suppose that the Federal Reserve (the "Fed") buys $4 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction? Checkable deposits rise by $4 million, and the banking system's holdings of securities rise by $4 million. The banking system's holdings of securities rise by $4 million, and the banking system's total reserves fall by $4 million. Checkable deposits rise by $4 million, and the banking system's total reserves rise by $4 million. The banking system's holdings of securities fall by $4 million,…
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One effect of the September 11, 2001, terrorist attacks was to temporarily prevent banks from accessing reserves they needed to meet the demands of their customers. (This occurred because the attacks destroyed many records as well as the computers required to access backup records, and it took affected banks several weeks to become fully operational.) In response, the Fed made many billions of dollars of reserves available to banks, gradually withdrawing the new reserves from the banking system as that system returned to normal. Suppose the Fed had not injected reserves in this way. What would likely have happened to interest rates as a result? What would have been the likely impact on the stock market and on spending by consumers and businesses? Would the unemployment rate have gone up or down? Explain your reasoning in each case.
Suppose that National bank has $36 million in checkable deposits, Commonwealth bank has $45 million in checkable deposits and the required reserve ratio for checkable deposits is 10%. If the National bank has $4 million in reserves and Commonwealth has $5 million iin reserves, how much excess reserves does each bank have? Suppose that a customer of the National bank writies a check for $2 million to a real estate broker who deposits the check at Commonwealth bank. After the check clears, how much excess reserves does each bank have?
26. Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. • The dealer deposits this cheque at Bank XYZ, a commercial bank. • The target reserve ratio for all commercial banks is 20%. • All commercial banks operate with no excess reserves. • There is no cash drain. Bank XYZ is immediately in a position to expand its loans by $1 million. $5 million. $25 million. $4 million. $3.75 million.
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 5%. Manuel, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Complete the following table to show the effect of a new deposit excess and required Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves (Dollars) (Dollars) 200,000 Liabilities Change in Required Reserves (Dollars) Southeast Mutual Bank Walls Fergo Bank PJMorton Bank erves when the rec Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Kate, who immediately uses the funds to write a check to Hubert. Hubert deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank…