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 $20 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 1.00 percent, the Fed has to reduce the interest it pays on bank reserves. If the Fed reduces the interest it pays on reserves to 0.50 percent, the equilibrium federal funds rate will equal percent but it has to supply additional reserves of market operations. billion dollars to commercial banks through open

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 $20 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 1.00 percent, the Fed has to reduce the interest it pays on bank reserves. If the Fed reduces the interest it pays on reserves to 0.50 percent, the equilibrium federal funds rate will equal percent but it has to supply additional reserves of market operations. billion dollars to commercial banks through open

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 4P

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Round Deposits Required Reserves of 20% Excess Reserves New Loans None of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 $100 $400 $400 0 $400 2 $400 $80 $320 $320 0 $320 3 $320 $64 $256 $256 0 $256 4 $256 $51.20 $204.80 $204.80 0 $204.80 5 $204.80 $40.96 $163.84 $163.84 0 $163.84 6 $163.84 $32.77 $131.07 $131.07 0 $131.07 7 $131.07 $26.21 $104.86 $104.86 0 $104.86 8 $104.86 $20.97 $83.89 $83.89 0 $83.89 9 $83.89 $16.78 $67.11 $67.11 0 $67.11 10 $67.11 $13.42 $53.69 $53.69 0 $53.69 Totals $2231.57 $417.31 $1785.26 $1785.26 0 $1785.26 Calculate the new money supply. (Enter response here.) Calculate the money multiplier.
Round Deposits Required Reserves of 20% Excess Reserves New Loans 50% of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 $100.00 $400.00 $400.00 $200.00 $200.00 2 $200 $40 $160 $160 $80 $80 3 $80 $16 $64 $64 $32 $32 4 $32 $6.40 $25.60 $25.60 $12.80 $12.80 5 $12.80 $2.56 $10.24 $10.24 $5.12 $5.12 6 $5.12 $1.02 $4.10 $4.10 $2.05 $2.05 7 $2.05 $.41 $1.64 $1.64 $.82 $.82 8 $.82 $.16 $.66 $.66 $.33 $.33 9 $.33 $.07 $.26 $.26 $.13 $.13 10 $.13 $.03 $.10 $.10 $.05 $.05 Totals $833.25 $166.65 $666.60 $666.60 $333.30 $333.30 Calculate the new money supply. Calculate the money multiplier.
12 You work for the treasury department of a medium sized bank. You are concerned about liquidity risk since there is increased volatility in the market. Would you prefer to fund a 6-month corporate loan using a 180-day CD or via demand deposits? Why?
The following financial statement is for the current year. From the past, you know that 10% of fixed-rate mortgages prepay each year. You also estimate that 10% of checkable deposits and 20% of savings accounts are rate sensitive. Second National Bank Assets Liabilities Reserves $ 1,500,000 Checkable Deposits $ 15,000,000 Securities Money Market Deposits $ 5,500,000  1 Year $ 6,000,000 Savings Accounts $ 8,000,000 1 to 2 Years $ 8,000,000 CDs  2 years $ 12,000,000 Variables-rate $ 15,000,000 Residential Mortgages  1 Year $ 22,000,000 Variables-rate $ 7,000,000 1 to 2 Years $ 5,000,000 Fixed-rate $ 13,000,000  2 years $ 2,500,000 Commercial Loans Fed Funds $ 5,000,000  1 Year $ 1,500,000 Borrowings 1 to 2 Years $ 18,500,000  1 Year $ 12,000,000  2 years $ 30,000,000 1 to 2 Years $ 3,000,000 Buildings, etc. $ 2,500,000  2 years $ 2,000,000 Bank Capital $ 5,000,000 Total $100,000,000 Total $100,000,000 (a) What is the current Income GAP for Second National Bank? (b) What will…
Fed Funds Rate 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0$ $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 $650 $700 $750 $800 Federal Funds ($Billions) Consider the above graph that shows demand for excess reserves by the banking system as a whole. Currently banks as a whole are holding an excess reserve of $350 billion. The graph indicates that the Fed is paying percent interest on bank excess reserves and that the equilibrium fed funds rate is percent. If the Fed reduces the interest on bank reserves to one percent, the equilibrium fed funds rate will equal percent.
Table 14.1: FIRST COMMERCIAL BANK Asset Liabilities Total Reserves: S150,000 $100,000 $1,000,000 $200,000 Deposits Net Worth Required Reserves Excess Reserves ? ? Loans $1,200,000 Total $1,200,000 Total 14. Refer to Table 13.1. First Commercial Bank's total loans equal S a) 1,050,000 b) 1,200,000 c) 1,150,000 d) 1,250,000
Deposit Reserve Requirement Money Multiplier Potential Money Creation $1,000 10% From above $1,000 20% From above $1,000 25% From above With a deposit of $1,000 and the reserve requirement of 10% what is the potential money creation? Group of answer choices $5,000 none of the above $10,000 $4,000
Table 13.1: FIRST COMMERCIAL BANK Asset Liabilities S150,000 S100,000 Total Reserves: $1,000,000 $200,000 Deposits Net Worth Required Reserves ? Excess Reserves ? Loans $1,200,000 Total $1,200,000 Total 15. Refer to Table 13. 1. First Commercial bank's excess reserves equal $ a) 150,000 b) 250,000 c) 100,000 d) 50,000
11. Macroland has a very simple banking system, in which there is only one chartered bank (The First Bank). The government of Macroland imposes a minimum required reserve ratio of 3%. Individuals in Macroland hold a fixed amount of $1200 in the form cash to facilitate their daily transactions and will deposit any excess amount of money into their bank accounts. The initial balance sheet of the First Bank is as follows: Assets Liabilities & Equity Reserves $255 Chequable deposits $7500 Loans $7400 Shareholder equity $155 Note: Unless otherwise stated, the First Bank will hold the excess reserves fixed at the current level as shown in the initial balance sheet and will lend out any surplus of reserves beyond this. a. Find the required reserves and the excess reserves held by the First Bank. b. Suppose there is a change in money demand such that people increase their cash holdings by $45 by withdrawing cash from their bank accounts. By how much will the money supply change? c. Return to…
16) Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth as a percentage of assets would B) decrease; 1.8% C) increase; 1.4% D) decrease; 1.4% by approximately. A) increase; 1.8%