Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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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 you win on a scratch-off lottery ticket and you decide to put all of your $2,500 winnings in the bank. The reserve
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What is the maximum possible increase in the money supply as a result of your bank deposit?
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All money loaned out is deposited back into the banking system.
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Some loan recipients choose to hold some cash instead of depositing all of it in banks.
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Suppose that the Federal Reserve has set a reserve requirement of 10 percent and that banks will not hold any excess reserves.
a) If the Federal Reserve conducts open market operations and sells $1 million worth of government bonds to the public, by how much will the money supply decrease?
b) Now suppose the Federal Reserve lowers the reserve requirement to 5 percent, but all banks choose to hold an additional 5 percent of deposits as excess reserves. How will this change affect the money supply? Explain.
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.
Chapter 13 Solutions
Economics: Private and Public Choice
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Similar questions
- Suppose Adrienne receives a payment in cash of $400 and she deposits it in a bank. i. If the banking system is 100 percent reserve, how does the money supply change? i. If the reserve requirement is 10 percent and the bank holds no excess reserve, how does the money supply change? in. If the reserve requirement is 10 percent and the bank holds an excess reserve of 2 percent, how does the money supply change? iv. Now suppose the reserve ratio is 25 percent. How much money can be created from $100 of reserves? Show your work.arrow_forwardSuppose the money supply is currently $500 billion and the Fed wishes to increases it by $100 billion. Given a required reserve ration of 0.25, what should it do? If it decided to change the money supply by changing the required reserve ratio, what change should it make? Why may the Fed be reluctant to change the reserve requirement?arrow_forwardSome 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_forward
- Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Joe, who deposits the $100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which(a) Security Bank finds itself short of required reserves,(b) Serenity Bank finds it has excess reserves, and (c) loans, checkable deposits, and the money supply change as a result of the transactions.arrow_forwardIn 2019, a Federal reserve publications stated: " The federal reserve can no longer effectively influence the FFR by small changes in the supply of reserves." Is this statement true? 1. No, since the 2007-2009 financial crises, the Fed has fixed the FFR to match the level of reserves held in the banking system. 2. Yes, since the 2007-2009 financial crises, banks have held substantial excess reserves so small changes in reserves by the Fed do not significantly influence the FFR 3. No, the FFR always reacts to the level of reserves, so any changes in reserves by the Fed will impact the FFR 4. Yes, since the 2007-2009 financial crises, banks have stopped holding excess reserves altogether so small changes in reserves have no impact on the FFRarrow_forwardSo I have the first part down but I am not so sure of my answers for the true or false questions. I don't think I'm understanding them correctlyarrow_forward
- Suppose 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_forwardSuppose that the reserve requirement for checking deposits is 10 percent and that banks do not have hold any excess reserves. If the Fed sells 1 million of government bonds, what is the effect on the economy's reserves and money supply? Now, suppose that the Fed lowers the reserve requirement to 5 percent but the banks choose to hold another 5 percent of deposits as excess reserves. What is the overall change in the money multiplier and the money supply as a result of these actions?arrow_forwardSuppose banks keep no excess reserves and no individuals or firms hold on to cash. If someone suddenly discovers $12 million in buried treasure and deposits it in a bank, explain what will happen to the money supply if required reserve ratio is 10 percent.arrow_forward
- Yesterday Bank A had no excess reserves. Today it received a new deposit of $ 4,000a.If the bank maintains a reserve requirement of 2 percent, what is the maximum loan that Bank A can make? b.What is the maximum amount by which the money supply can be increased as a result of Bank A’s new loan?arrow_forwardSuppose that the central bank has increased the money supply such that there is an additional $989699 in excess reserves. If the reserve ratio is 4.0 percent, what is the maximum increase in money supply? Round your answer to the nearest dollar.arrow_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_forward
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