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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Chapter 25, Problem 6.3P
To determine
To discuss the measures of the Central Bank, which can lead to a decrease in the money supply.
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Say that First Commercial Bank has reserves of $100, loans at $400 and
checkable deposits of $500. The required reserve ratio is 10%. If the bank
has a deposit outflow of $40, is the bank in violation of the required
reserve ratio? What is the maximum amount of deposit outflow the bank
can sustain without violating the ratio?
Suppose 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?
To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could
decrease the interest rate it pays on reserves.
sell Treasury securities.
raise government spending.
lower the required reserve ratio.
Chapter 25 Solutions
Principles of Economics (12th Edition)
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- If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary basearrow_forwardThe Bank of Canada sets the reserve requirement, which banks must meet through deposits at the Bank of Canada and cash held at the bank. What do these requirements achieve? Check all that apply. They help to facilitate transfers of funds between banks when a customer from one bank writes a cheque to a customer of another. They help to control the money supply. They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash. They mean that a bank must have one dollar of deposits for every dollar it lends.arrow_forwardYou just earned $25.000 which you deposit it in a bank account, How much can fractional-reserve banking potentially increase the money supply if only 10% of the deposit is kept in reserve by the bank.arrow_forward
- The initial condition of the banking system is as follows: $500 billion in reserve, $4,500 billion in loans and investments, and 5,000 billion in deposits. The required reserve is 10%. The Fed buys $100 billion government securities using open market operation, and lowers the reserve requirement to 5%. The banking system converts 85% excess reserves to loans, but borrowers return only 65% of these funds to the banking system as deposits. What is the maximum amount of loans in the banking system as a result of such Fed operation?arrow_forwardUse the supply and demand analysis of the market for reserves to visually illustrate and explain how the following scenarios may arise in equilibrium. An increase in the reserve interest rate increases the interbank rate and makes it equal to the discount rate.arrow_forwardYou 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_forward
- If Jason deposits $2,500 into his bank and the reserve ratio is 11%, what would be the amount of excess reserves that are immediately created? $30.25 $244.75 $275 $1,980.25 $2,225arrow_forwardSuppose 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.arrow_forwardHow much will the money supply increase if excess reserves increase by $40 million and the reserve requirement is 21 percent? Multiple Choice $4.76 million $190.48 million $1.90 million $840.00 millionarrow_forward
- Suppose that the T-account for First California Bank is as follows. The required reserve ratio is 10%. Suppose that the Fed buys $20,000 securities from First California Bank. As a result of the Fed’s purchase of $20,000 securities from First California Bank, how much of money supply will change? Is the change in money supply an increase or a decrease?arrow_forwarda) 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_forwardSuppose that the required reserve ratio is 8%, currency in circulation is $600 billion, the amount of checkable deposits is $890 billion, and excess reserves are $15 billion. The money supply is $ 1490 billion. 600 billion + 890 billion = 1490 billion The currency deposit ratio is 0.67. 600/890 = 0.67 The excess reserve ratio is 0.16 or 0.02 (if we are rounding). 15/890 = 0.169 The money multiplier is 12.5 1/%8 = 1/0.08 =12.5 Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1,300 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in the previous steps are the same, the money supply should (1) _____ to $ 17,740 billion. 1300 x 12.5 = 16250 + 1490 = (the top part is just up to provide a reference for the bottom question) Suppose the central bank conducts the same open market purchase as in the previous step, except that banks choose to hold all of these proceeds as excess reserves rather than loan…arrow_forward
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