Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 25, Problem 2.5P
Sub part (a):
To determine
How much the bank needs to keep as reserves.
Sub part (b):
To determine
The
Sub part (c):
To determine
By how much can the bank increase its loan.
Sub part (d):
To determine
The new T-account for the bank.
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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%.
How much maximum of new money will be created (maximum amount of new checking deposits created
by the banking system) as a result of your bank deposit? Hint: do not count your initial deposit as part of
increase.
Number
$70000
☐ ☐
Incorrect.
The bank can only loan out excess reserves. Calculate the
excess reserves after the lottery winnings were deposited,
than multiple that number by the money multiplier.
Which events could cause the increase in the money supply to be less than its potential?
Check all that apply.
Some loan recipients choose to hold some cash instead of
depositing all of it in banks.
All money loaned out is deposited back into the banking
system.
Banks decide to keep some excess reserves on hand.
Banks choose to loan out all excess reserves.
Suppose that we are a bank with $3,000 worth of deposits. We operate in an economy with a
mandated reserve ratio of 12%. Suppose that the bank is keeping $450 in reserves currently,
loaning out the rest of its deposits.
9. Is the bank meeting its reserve requirements? Does it have excess reserves? How much
more or less must the bank lend out to just exactly meet its reserve requirements?
10. If the bank takes the action you prescribe in your answer to Question 9, how much will
the total amount of deposits in the whole banking system change? Assume no cash
drain.
11. Suppose instead that there is cash drain of 8%. Now, how much would this same action
prescribed in your answer to Question 9 change the total amount of deposits in the
whole banking system?
3.
Q. 4
Chapter 25 Solutions
Principles of Economics (12th Edition)
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- You just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 20%, how much will your deposit increase the total value of checkable bank deposits? If the reserve requirement is 8%, how much will your deposit increase the total value of checkable deposits? Increasing the reserve requirement decreases the money supply. %24 %24arrow_forwardEconomics Suppose a banking system has $ 130,000 of checkable deposits and actual reserves of $ 20,000. If the reserve ratio is 7% Required Reserves in the banking system are equal to: $ Report your answer as a whole number (no decimals)arrow_forwardSuppose the total reserves (RR+ER) in the banking sector is $5 trillion. The central bank has set the required reserve ratio (rr) at 5%. Assuming that the banks prefer to hold zero excess reserves (ER), answer the following questions.arrow_forward
- Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $5,000 insecurities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. Instructions: Enter your answer as a whole number. What level of excess reserves does the bank now have?arrow_forwardYou take $300 you had kept under your mattress and deposit it in your bank account. Suppose this $300 stays in the banking system as reserves and banks hold reserves equal to 15 percent of deposits. The total amount of deposits in the banking system increases by $ supply increases by $. and the moneyarrow_forwardComplete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Kate, who immediately uses the funds to write a check to Hubert. Hubert deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Shen, who writes a check to Poornima, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Valerie in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves…arrow_forward
- Assuming a bank only keeps enough of its reserves to meet its reserve requirement, how much money is created after the Federal Reserve purchases $40,000 worth of bonds from a bank (this means they deposit $40,000 in that bank's reserve account) and there is a 25% reserve requirement? Hint: enter your answer without a comma or $ sign. Example: if the answer is $44,000 enter 44000 as your answer. Show Transcribed Text Assuming a bank only keeps enough of its reserves to meet its reserve requirement, how much money is created when a bank receives a deposit from an individual of $60,000 and there is a 10% reserve requirement. Hint: enter your answer without a comma or $ sign. Example: if the answer is $44,000 enter 44000 as your answer.arrow_forwardBelow is a short version of the balance sheet at Wells Fargo. Assume this bank has a 15% reserve requirement. Wells Fargo Assets Liabilities Total Reserves $250,000 Deposits $100,000 1. What is the maximum this bank can lend out? $ 2. Mr. Smithers decides to withdraw $25,000 from his checking account here after which the bank will now make $45,000 in loans and purchase $14,000 in securities from the Fed. After all these transactions take place, answer the following questions. (Enter your response rounded to the nearest whole number). a. The bank now has Total Reserves in the amount of $☐ b. The bank now has Required Reserves in the amount of $ c. The bank now has Excess Reserves in the amount of $ d. The bank is now limited to making additional loans up to the amount of $ e. The value of the simple money multiplier is (round to just 1 decimal) f. Should this bank lend its entire remaining reserves, the banking system can see an increase in the money supply of $arrow_forward# 4. If a bank has $20,000 in deposits, and $2,500 in reserves, and if rr=10%, e=2.5% and c=15%, how much excess reserves does the bank have? Be clear about whether this is positive or negative. #5. If a bank has $20,000 in deposits, and $2,500 in reserves, and if rr=10%, e=2.5% and c=15%, how much currency is in circulation? Be clear about whether this is positive negative.arrow_forward
- a) Suppose that Tk.10,000 in new taka bills (never seen before) falls magically from the sky into your hands. What are the minimum increase and the maximum increase in the money supply that may result? Assume the required reserve ratio is 10 percent. Explain in details.b) Suppose you receive Tk. 10,000 from your grandmother and deposits the money in a saving account. your grandmother gave you the money by writing a check on her saving account. Would the maximum increase in the money supply still be what you found it to be in part a) where you received the money from the sky? Why or why not? Explain in details. c) Suppose that instead you getting Tk. 10,000 from the sky or a check through your grandmother, you get the money from your mother who had buried it in a can in her backyard. In this case, would the maximum increase in the money supply be what you found it to be in part a)? Why or why not? Explain in details.arrow_forwardComplete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited (Dollars) 500,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars) Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Neha, who immediately uses the funds to write a check to Lorenzo. Lorenzo deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Andrew, who writes a check to Teresa, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Beth in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Southeast Mutual Bank Walls Fergo Bank PJMorton Bank Increase in Deposits…arrow_forwardExcess reserves are insurance from deposit outflow. Suppose you hold 15 million required reserves and 45 million excess reserves at the central bank. The total interest payment on reserves from the central bank is 0.3%. If you do not hold your excess reserves at the bank, you may take loans and earn 4% in average. What is the cost of holding excess reserve at the central bank?arrow_forward
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