Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 13, Problem 16CQ
(a)
To determine
Identify the impact of the transaction on the supply of money.
(b)
To determine
Identify the amount of additional loan extends in the economy.
(c)
To determine
Identify the changes in the quantity of the checkable deposit.
(d)
To determine
Explain the expectation.
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Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent:a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount. b. By how much has the supply of money changed? Explain. c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in column 2. d. Answer questions a, b, and c on the assumption that the reserve ratio is 15 percent.
Suppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve
requirement is 5%.
What is the maximum possible increase in the money supply as a result of your bank deposit?
maximum increase: $
Which events could cause the increase in the money supply to be less than its potential?
Banks choose to loan out all excess reserves.
Some loan recipients choose to hold some cash instead of depositing all of it in banks.
Banks decide to keep some excess reserves on hand.
All money loaned out is deposited back into the banking system.
Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to
2008.) 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 $300. 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)
5
10
A higher reserve requirement is associated with a
money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that
households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to
2$
worth
of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin…
Chapter 13 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Some individuals have suggested raising the required reserve ratio for banks to 100 percent in a limited reserve banking system. a. What would the money multiplier be if this change was made? Assume people hold no cash. Instructions: Enter your response as a whole number. b. What effect would such a change have on the money supply? The money supply would decrease c. How could that effect be offset? By a decrease in government spending By an increase in government spending By an increase in taxesarrow_forwardSuppose that Rina makes a new cash deposit of $85,000 at her bank. Suppose that the bank is required only to keep new cash reserves equal to 25%. Then the maximum amount Rina's deposit will money supply is $ increase the decrease Which of the following assumptions must hold to ensure that the money creation process initiated by Rina's deposit reaches its potential? Check all that apply. Some borrowers cash the newly acquired funds. At least one bank in the banking system is conservative enough to keep some of its newly acquired cash deposits in its vault. All borrowers quickly spend all of their newly acquired funds. All banks in the banking system lend all of their excess reserves.arrow_forwardSuppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?arrow_forward
- What steps can the Federal Reserve take to increase the money supply? a) The Federal Reserve can reduce personal income tax rates to encourage households to spend more money b) The Federal Reserve can require all banks to close by 4:00 pm on weekdays and remain closed on weekends. c) The Federal Reserve can increase reserves requirements for banks d) The Federal Reserve and raise the discount e) The Federal Reserve can buy US Treasury securities e) The Federal Reservearrow_forwardAssume that the reserve requirement ratio is 20 percent. Calculate the dollar value of the reserves that the Bank of Uchenna is required to hold. Given the current reserves, calculate the maximum value of additional loans that the Bank of Uchenna can make. Assume that Elike raises $5,000 in cash from a yard sale and deposits the cash in his checking account at the Bank of Uchenna. By how much does the money supply immediately change as a result of Elike’s deposit? Calculate the maximum change in demand deposits in the banking system as a whole resulting from Elike’s deposit. If the Bank of Uchenna is not meeting its reserve requirement, what action can it take to meet the reserve requirement without calling in loans or selling property?arrow_forwardSuppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currencydeposit ratio is 20 percent.a. If the Central Bank increases the monetary base by $400 through open market operations, what will be the increase in the money supply?b. If the Central Bank increases the discount rate and firms react by increasing the reservedeposit ratio to 15 percent, what is the change in the multiplier? Will this change increase or decrease the money supply?arrow_forward
- Suppose the ratio of deposits that banks hold in the form of reserves is 7 percent. Suppose further that people want to hold 8 percent of their deposits in the form of cash. Then, if the Fed wants the money supply to be $6,228 billion, what is the necessary level of high-powered money?arrow_forwardIf the Required Reserve Ratio is 0.10, what does the Fed need to do to contract the supply of money by $40 billion? Select one: a. Buy $2 billion worth of government bonds from banks b. Buy $4 billion worth of government bonds from banks c. Buy $8 billion worth of government bonds from banks d. Sell $4 billion worth of government bonds to banks e. Sell $2 billion worth of government bonds to banks f. Sell $8 billion worth of government bonds to banksarrow_forwardWhat will be the money supply, if the central bank purchases a government bond from an individual who deposits all the money that has been received from the sale in the bank? a) Rise by an amount that depends on the banks reserve ratio b) Fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio c) Rise by less than the amount of the deposit d) Be unchangedarrow_forward
- please answer in text form and in proper format answer with must explanation , calculation for each part and steps clearlyarrow_forwardAssume 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 $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. A higher reserve requirement is associated with a __larger, smaller__money supply.Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to ____buy / sell_$___________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, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve…arrow_forwardWhich of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves? Select one: a. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease b. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase c. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment d. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employmentarrow_forward
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