Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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)
Knowledge Booster
Similar questions
- 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 banks keep no excess reserves and that all banks are currently meeting their desired reserve requirement. The Bank of Canada then makes an open market purchase of $13,000 from Bank 1. Use the T-account below to show the result of this transaction for Bank 1, assuming Bank 1 keeps no excess reserves after the transaction. (Remember T-accounts show the changes to a bank's balance sheet.) Bank 1's T-account Assets Liabilities Reserves $ Deposits $ Loans $ Securities $arrow_forward
- Suppose 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_forwardSuppose that your bank's reserve ratio is 0.2 and you deposit $50,000 into the bank. Assume that the bank loans out the maximum amount it can, and people deposit all their money. What is the deposit multiplier? What is the total increase in deposits in the banking system? What is the change in the money supply?arrow_forwardSuppose 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_forward
- You 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_forwardAssume that a bank receives a deposit of $1,000 in cash, puts aside $200 as required reserves, and makes a loan of $800, these transactions imply that: a) the money supply by the whole banking system can increase by $1,000. b) the money supply by the whole banking system can increase by $4,000. c) the money supply by the whole banking system can increase by $8,000.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_forwardSuppose you found Rs. 2000 that was stored under your grandmother's mattress and you decided to deposit this money in a Bank of India. If the desired reserve ratio were 20 percent and all excess reserves were lent out. a) Calculate the money supply created by this deposition in the economy?b) Following a new deposit of Rs. 2000, what is the reserve requirement of the commercial bank?c) Suppose all the banks in the banking system collectively have Rs.20 million in cash reserves and have a desired reserve ratio of 20 percent, the maximum amount of demand deposits the banking system can support is?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning