Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $150 091$ Bank Excess Reserves ($Billion) Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $10 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 0.50 percent, the Fed has to increase the amount of reserves by $10 billion and reduce the interest it pays on bank reserves to percent.

Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $150 091$ Bank Excess Reserves ($Billion) Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $10 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 0.50 percent, the Fed has to increase the amount of reserves by $10 billion and reduce the interest it pays on bank reserves to percent.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that Walls Fergo Bank currently has $100,000 in demand deposits and $65,000 in outstanding loans. Assume the Federal Reserve has the reserve requirement set at 10%. Based on this information, complete the following table detailing Walls Fergo Bank's reserves, required reserves, and excess reserves. Reserves (Dollars) Walls Fergo Required Reserves (Dollars) Excess Reserves (Dollars)
7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Hubert, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street 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) 500,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the funds to write a check to Clancy. Clancy…
Total reserves $55 billion Transactions deposits: $600 billion Cash held by public: $400 billion Bonds held by public: $400 billion Stocks held by public: $140 billion Gross domestic product: $8 trillion Interest rate: 6 percent Required reserve ratio: 0.10 How large is the money supply (M1)? How much excess reserves are there? What is the money multiplier? What is the available lending capacity?
14. Suppose the actual overnight interest rate is 5%. If the central bank lowers its target overnight rate to 4.5%, the money supply will eventually decrease as a result of an increase in excess reserves in the banking system. decrease as a result of open-market operations. increase as a result of open-market operations. decrease as a result of a decrease in the demand for new loans. increase as a result of an increase in excess reserves in the banking system.
Use the information given in Great Lakes National Bank's balance sheet to answer the following questions. Assets Reserves Loans Securities Bank's Balance Sheet $175 $700 $875 Liabilities and Owners' Equity Deposits $1,400 Debt Capital (owners' equity) $225 $125 Suppose the owners of the bank contribute an additional $200 from their own funds and use it to buy securities in the name of the bank. This would increase the securities account and the account. This would also bring the leverage ratio from its initial value of to a new value of Which of the following statements regarding the capital requirement is true? Check all that apply. Its intended goal is to protect the interests of those who hold equity in the bank. It specifies a minimum leverage ratio for all banks. Its intended goal is to protect the interests of the depositors.
Real-Time Data Analysis Exercise* *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. The table shows the quantities of M1, M2, and their components in August 2022 but with two values missing and shown in the table as 0.0. What are the missing values? >>> Answer to the nearest 1 decimal place. Other liquid deposits are $ Demand deposits are $ billion. billion. C Measures and Components of Money in August 2022 M2 Money market funds Small time deposits M1 Demand deposits Other liquid deposits Currency Amount August 2022 (billions f dollars) 21,711.4 1,096.3 162.2 20,452.9 0.0 0.0 2,178.5
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place: Balance Sheet for Ecoville International Bank ASSETS LIABILITIES Cash $33,000 Demand Deposits $99,000 Loans 66,000 Now assume that the Fed lowers the reserve requirement to 8%. What is the maximum amount of new loans that this bank can make? Assume that the bank makes these loans. What will the new balance sheet look like? By how much has the money supply increased or decreased? If the money multiplier is 5, how much money will ultimately be created by this event?
1.4 Suppose you transfer $4,000 from your money market mutual fund account to your checking account. What is the immediate impact of this transfer on M1 and M2? 1.5 Why do banks create money? Do they create money to help the Federal Reserve control the money supply or is there a more basic reason? 1.6 Suppose that the required reserve ratio is 2 percent, and you deposit $100,000 of currency into Chase Bank. What is the potential increase in deposits in the banking system brought about by your deposit? What is the potential change in the money supply?
Assuming a bank only keeps enough of its reserves to meet its reserve requirement, how much money is created after the Federal Reserve purchases $40,000 worth of bonds from a bank (this means they deposit $40,000 in that bank's reserve account) and there is a 25% reserve requirement? Hint: enter your answer without a comma or $ sign. Example: if the answer is $44,000 enter 44000 as your answer. Show Transcribed Text Assuming a bank only keeps enough of its reserves to meet its reserve requirement, how much money is created when a bank receives a deposit from an individual of $60,000 and there is a 10% reserve requirement. Hint: enter your answer without a comma or $ sign. Example: if the answer is $44,000 enter 44000 as your answer.
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Felix, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 25%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 1,800,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Deborah, who immediately writes a check for the full amount to Carlos.…
1 t 2 The reserve requirement. Complete the following information and write appropriate title or answers on each line. Assets Required Reserves $60 Excess Reserves _$0 Securities $80 Loans Total Assets 100 Required Reserves Excess Reserves Securities $240 Loans Total Assets 63 2.1 Based on the balance sheet, the initial reserve requirement is 60. 2.2 Suppose the fed lowers the reserve requirement by 0.05. How many dollars of excess reserves does this create? $0 Balance Sheet for Banking System Lrabilities 2.3 What is the additional lending capacity due to the change in the reserve requirement? 2.4 Reconstruct the Balance Sheet for Banking System with changes. New Balance Sheet for Banking System Deposits 80 Deposits 100 Net Worth Total Liabilities and Net Worth $240 Net Worth Total Liabilities and Net Worth $0 $240 2.5 What is the expansion of the Money Supply? 2.6 Loans have gone up by. _$0