Question 3 - a. Distinguish between legally required reserves and excess reserves. b. Why don't banks hold a 100 percent reserves? c. How is the amount of reserves bank hold related to the amount of money the banking system creates? d. Assume that Lucky Bank is required to hold a 10% deposits as reserves, and there is a $3000 increase in demand deposits. i. Calculate the money multiplier? ii. How much additional new demand deposits could the $3,000 deposit support?

Question 3 - a. Distinguish between legally required reserves and excess reserves. b. Why don't banks hold a 100 percent reserves? c. How is the amount of reserves bank hold related to the amount of money the banking system creates? d. Assume that Lucky Bank is required to hold a 10% deposits as reserves, and there is a $3000 increase in demand deposits. i. Calculate the money multiplier? ii. How much additional new demand deposits could the $3,000 deposit support?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter27: Money And Banking

Section: Chapter Questions

Problem 31P: Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money,...

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Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?
Explain what will happen to the money multiplier process if there is an increase in the reserve requirement?
Question B
7. What is the required reserve ratio? A) The suggested percentage of total deposits that a bank should keep on reserve B) The legally mandated percentage of total deposits that a bank must keep on reserve. C) The legally mandated percentage of total deposits that a bank must send to the federal reserve bank D) The legally mandated percentage of total deposits that a bank may invest 8. What are excess reserves? A) The amount banks must keep on hand for customers B) Total reserves plus required reserves C) The amount banks can safely invest in high risk activities D) Total reserves minus required reserves
19)Consider the following scenario. The currency deposit ratio is 0.5, the required reserve ratio is 0.25. The bank holds the required reserves, plus a little extra in case of a large withdrawal equal to e(R)=0.5-2R. Where R is the interest rate and it is equal to 12.5. The money supply is £600. Using the money multiplier approach calculate how many pounds worth of bonds would the Bank of England have to buy/sell in order to increase the money supply to £900? a. Sell bonds for an amount equal to $200. b. Buy bonds for an amount equal to $200. c. Buy bonds for an amount equal to $400. d. Sell bonds for an amount equal to $250.
Assume the banking system has $200 billion in demand deposits and $80 billion in reserves. In addition, assume that the required reserve ratio is 25%. Answer the following questionsa. a)How much excess reserves are in this system? b)What is the value of the money multiplier? c)How much of money supply will be created if the banking system lent out all of its excess reserves?
Q. 2 Consider a small economy. Suppose that currency in circulation is $200 million, the amount of chequable deposits is $1000 million, and excess reserve holding is $60 million and desired reserve holding ratio is 10%. a) How much money does the economy have? b) How much is its monetary base? c) How much is its money multiplier? 1.5P 1.5P 2P d) If the central bank (CB) conducts an open market purchase of $50 million with an LVTS participant and hence its monetary base (MB) changes accordingly, how much money created in its 1st step, 2nd step and 3rd step of the money creation process for the MB change? And, how much total money created in the end for the MB change?
Question 3 (a) Distinguish between legally required reserves and excess reserves. (b) Why don’t banks hold a100 percent reserves? How is the amount of reserves bank hold related to the amount of money the banking system creates? Assume that Lucky Bank is required to hold a10% deposits as reserves, and there is a $3000 increase in demand deposits. Calculate the money multiplier? How much additional new demand deposits could the $3,000 deposit support?
Handwritten calculation otherwise will dislike
8. The reserve requirement, open market operations, and the moneysupply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Supply (Percent) Simple Money Multiplier (Dollars) 15 10 A lower reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to $ worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically,…
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Part d