1. Suppose that the T-account for ECON 1002 Bank Open Campus (ECON 1002) is as follows:AssetsLiabilitiesReserves $100,000Deposits $500,000Loans400,000 (i)If the Central Bank requires banks to hold 10% of deposits as reserves, how much in excess reserves does ECON1002 now hold?(ii) If ECON 1002 decides to reduce its reserves to only the required amount, by how much would the economy'smoney supply increase?2. Why don't banks hold a 100 percent reserves? How is the amount of reserves bank hold related to the amount ofmoney the banking system creates?3. Distinguish between legally required reserves and excess reserves.

ECON 1002 Introduction to Macroeconomics in which that the principal method used By the central…

Answered: If the Central Bank requires banks to…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the model of supply and demand for central bank money. Assumethat there there are commercial banks. Suppose that people hold 20% of their moneyin currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of moneyby $200, buying bonds through Open-Market Operations. Use this information to answerthe following questions:(a) For the second period (after the central bank has injected $200 in theeconomy), calculate: (i) the demand for currency, (ii) the amount of deposit held atthe commercial banks, (iii) the demand for reserves held at the central bank, and(iv) the demand for the high-powered money. How much is the additional moneysupply created at the end of the second period?2(b) How much is the additional money supply created at the end of the thirdperiod?(c) As time continues, additional money supply will be created. Calculatethe total increase in the money supply as a…
Banks in New Transylvania have a desired reserve ratio of 10 percent of deposits and noexcess reserves. The currency drain ratio is 50 percent of deposits. Now suppose that thecentral bank increases the monetary base by $900 billion.i. How much do the banks lend in the first round of the money creation process?ii. How much of the initial amount loaned flows back to the banking system as newdeposits?iii. How much of the initial amount loaned does not return to the banks but is heldas currency?iv. Why does a second round of lending occur?v. Calculate money multiplier in this example?vi. What is the final increase in the quantity of money?
Scenario 14-2 Imagine that Kristy deposits $10,000 of Federal Reserve notes for deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of (hint: remember Bank A has to back a fraction of Kristy's new checking account balance) O $50,000, O $10,000 O $2,000. $8,000.
The reserve requirement is 10%. Suppose that the Fed purchases $50,000 worth of U.S. government securities from a bond dealer, electronically crediting the dealer's deposit account at Reliable Bank. Which of the following correctly describes the immediate effect of this transaction? A. The required reserves of Reliable Bank increase by $50,000. B. The total reserves of Reliable Bank increase by $50,000. C. Reliable Bank can make $50,000 in new loans. D. The excess reserves of Reliable Bank increase by $50,000. -ம்
Table 10-2 Last Bank of Cedar Bend Assets: Reserves Loans Liabilities: $25 000 Deposits $180 000 S155 000 efer to the Table 10-2. If the reserve requirement is 10 percent and then someone deposits $50 000 into the bank, what is the bank's reserve osition? alect one: cross a. It will have $52 000 in excess reserves. cros b. It will need to raise reserves by $5000. cros c. It will have $57 000 in excess reserves. d. It will have excess reserves of $2000.
Ordinarily, banks try to keep excess reserves as low as possible because: O the Fed requires them to do so it is profitable to do so an excessive level of reserves could cause a run on the bank it looks neater in their accounting records
What is fiat money? Is the U.S. dollar fiat money? Are cryptocurrencies fiat money? What counts as M1 and M2 when it comes to the money supply? What are bank runs and how is deposit insurance designed to prevent runs from occurring? Can you think of a bank that recently experienced a bank run? What is the limit the FDIC will insure up to for checking and savings accounts? What is moral hazard and how is it caused by programs like deposit insurance? Given the idea of moral hazard, do you think deposit insurance help reduce systemic risk or cause more of it?
In a system of fractional-reserve banking, evenwithout any action by the central bank, the moneysupply declines if households choose to hold_________ currency or if banks choose to hold_________ excess reserves.a. more; moreb. more; lessc. less; mored. less; less
Suppose the Fed decides to purchase $60 billion worth of government securities on the open market. a. If the reserve ratio is 20 percent, what is the maximum potential change in the money supply? b. Why might the money supply not grow by this much? c. What will the purchase be by the Fed do to intrest rates? Why?
a)Explain why inside money might replace outside moneyb) Discuss why an increase in the reserve requirement might lower the rate ofreturn on deposits. How does your answer depend on whether there iscompetition between banks? c) Explain how changes in reserve requirements affect the real economy andconsumers’ consumption choice.
You have been given the banking and financial data in the following table. Your boss wants you to calculate the M1 money supply (using the U.S. laws and regulations) but forgets to tell you which year the data pertain to. You call your boss and she tells you that the data is for 2021. In that case, you calculate the following for your boss: Currency in Circulation $100 Demand Deposits $1,000 Savings Deposits $4,400 Small Time Deposits (Less than $100,000) $2,000 Large Time Deposits (Greater than $100,000) $4,000 Money Market Mutual Funds Deposits Owned by Individuals $1,000 Money Market Mutual Funds Deposits Owned by Institutions $5,000 Total Reserves in the Banking System $2,100 O a. M1 = $1,000 O b. M1 = $1,100 O c. M1 $2,200 = O d. M1 $4,300 O e. M1 $5,500
FIGURE 1 MS P2 r2 P1 AD MD2 r1 MD1 REFER TO FIGURE 1. If the money-supply curve MS on the left-hand graph were to shift to the right, this would O create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. All of the other answers are correct. O represent an action taken by the Federal Reserve. O shift the AD curve to the left.

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