Macroeconomics Chapters 12-16

If the reserve requirement is 25%, how much can a bank lend from an initial $1,000 deposit of cash?

$750

Suppose that the required reserve ratio is 3.003.00%. What is the simple money (deposit) multiplier? Round to two decimal places. money multiplier:

1/.03 = 33.3 decrease

If the reserve requirement is 10%, what is the money multiplier?

10... (1/%)

Which of the following is an example of the Fed making monetary policy?

Decreasing the discount rate to 2%

If the economy has just experienced a severe recession, which type of Fed policymaker would be more focused on a quick recovery?

Doves

Identify each statement as either true or false. In the United States, banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals. Banks typically loan out a portion of customer deposits. Bank runs occur when many customers attempt to withdraw deposits from a bank at the same time and the bank is unable to pay all customer withdrawals. The Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure. The fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs.

False True True True False

The _____ is the central bank of the United States.

Federal Reserve

Money Creation and the Federal Reserve: Around the World Swiss banks are the world's largest holder of offshore funds. However, changes in banking laws in Switzerland have reduced the popularity of Swiss accounts among foreigners in recent years. Suppose a wealthy family decides to move $50 million from their Swiss bank account to their Bank of America account. Assume an 8% reserve requirement in the United States and no money leakages. a. Calculate the money multiplier for the United States in this example. Submit your response to the nearest tenth. b. Calculate the maximum amount by which the U.S. money supply can grow as a result of the family's deposit.

Multiplier = 12.5 Growth = 625

Suppose that a bank has accepted $20,000 in checking deposits, $40,000 in savings deposits, has $10,000 in cash reserves, and made $50,000 in loans. What is the bank's reserve ratio?

16.6%

The actual money multiplier is lower than the theoretical maximum because of _____ in the economy.

leakages

Money Creation and the Federal Reserve: Around the World Swiss banks are the world's largest holder of offshore funds. However, changes in banking laws in Switzerland have reduced the popularity of Swiss accounts among foreigners in recent years. Suppose a wealthy family decides to move $50 million from their Swiss bank account to their Bank of America account. Assume an 8% reserve requirement in the United States and that Bank of America holds no excess reserves. Complete the T‑account for this transaction.

Reserves 1: 4 million Reserves 2: 50 million Loans 1: 46 millions

You have just begun a new job as a bank teller at Santa's Elf Bank. Your supervisor asks you what the difference is between reserves and excess reserves in terms of banking. You want to impress your supervisor, so you recall what you learned in your economics course in order to form your response. What is the difference between reserves and excess reserves in terms of banking?

Reserves refer to the cash banks have on hand to satisfy the Federal Reserve requirements. Excess reserves refer to the amount of reserves that banks have in excess of the legally required reserves.

Money Creation and the Federal Reserve: Around the World The popularity of Swiss bank accounts was driven in part by strong secrecy laws in Switzerland, severely limiting the amount of information that Swiss banks are able to disclose. However, there were other factors that lead to their popularity. Identify each factor which contributed to Swiss banks becoming the world's largest holders of offshore funds.

Switzerland's history of neutrality the long‑term stability of Switzerland's economy

Select the statement that best defines required reserves.

The amount of reserves a bank must keep on deposit at the Fed or in their vault on a given deposit.

Phil Frugal has been saving his pennies since he was 5 years old. He is now 45 and deposits his savings in a bank. His pennies total $5,000. Using this information and your knowledge of the banking system, select the best match for each item. Then calculate the values of reserves, required reserves, and excess reserves. Assume a required reserve ratio of 10%. a. The amount of interest the bank must charge on a loan b. The amount of funds banks must, by law, hold in reserve c. The amount a bank has on hand to fulfill the cash demands of its customers and the reserve requirements of the Fed d. The amount of reserves the bank owes to other banks e. The maximum amount of reserves available for loans f. The amount of reserves the bank must set aside to loan to member banks

a. none of these b. required reserves c. reserves d. none of these e. excess reserves f. none of these Reserves: $ 5000 Excess Reserves: $4500 Required Reserves: $ 500

Table 1 shows the financial position of Bank Uno once $3027.00 has been deposited. Assume that the required reserve ratio is 7.00%, that banks do not keep excess reserves, and that all the money loaned out from Bank Uno is deposited into Bank Duo (whose loans go to other banks not shown here). Once the lending and depositing process is complete, what will the accounts look like in Tables 2 and 3? Specify all answers to two decimal places. What are Bank Uno's deposits in Table 2? What are Bank Uno's reserves in Table 2? What are Bank Duo's loans in Table 3? What are Bank Uno's loans in Table 2?

deposits in table 2 = 3027.00 reserves in table 2 = deposits in table 1 x reserve ratio = 3027.00 x .07 loans in table 3 = deposits - reserves = 3027.00 - 211.90 loans in table 2 =2815.1 - (.70 x 2815.10) 197.057

Money can be created in the U.S. economy only by printing more paper money and minting more coins.

false

The _____ rate influences nearly all other interest rates in the economy.

federal funds

The main function of a central bank is to:

influence monetary policy

Suppose Robina Bank receives a deposit of $54,589 and the reserve requirement is 3%. Answer the questions using this information. Round your answers to two decimal places. What is the amount that Robina Bank must keep on hand as required by the Federal Reserve (Fed)? What is the amount that Robina Bank must have in excess reserves from this initial deposit? What is the total change in the M1 money supply from this one deposit?

keep on hand= 54589*0.03 = $1637.67 excess reserves: 54589-1637.67 = $52951.33 total change: 52951.33/0.07 = $756,447.57

Table 1 shows the financial position of the Smithville Bank once $3103.00 has been deposited. Assume that the required reserve ratio is 9.00%. The bank manager decides to lend Billy Bob Smith all of the bank's excess reserves. Billy Bob takes the funds to Eula Mae's Used Machines and buys a pickup truck. Eula Mae then deposits the money in her account back at the Smithville Bank. Table 2 should show the bank's accounts after the loan is made and the funds again deposited. Round all answers to the nearest cent. What are the bank's loans in Table 2? What are the bank's reserves in Table 2? What are the bank's deposits in Table 2?

loans= deposits - required reserves = 3103 - (3103 x 9%) reserves= required reserves + amount deposited = (3103 x 9%) + 2823.73 deposits= table 1 deposits + amount deposited = 3103 + 2823.73

Money Creation and the Federal Reserve: Around the World Swiss banks are the world's largest holder of offshore funds. Individuals and companies depositing U.S. dollars into Swiss bank accounts represent a _______ United States which ______ the actual U.S. money multiplier relative to its potential.

money leakages; decreases

The _____ enables calculation of the maximum amount of money that can be created from a dollar deposited into the banking system.

money multiplier

The portion of deposits that banks must keep on hand for day-to-day operations and other purposes is called the:

reserve requirements

One of the Federal Reserve's main monetary policy tools is:

setting the discount rate which establishes the cost to banks of borrowing from the Fed.

Much of the money creation in the U.S. economy is done through actions of _____ and _____.

the Federal Reserve; commercial banks

A foreign entity holding cash is considered a leakage in the economy.

true

The reserve requirement is the proportion of its deposits that a bank must keep on hand and not use to create money through making loans to borrowers.

true

When the economy is _____, money leakage tends to rise; this tends to slow the money creation process.

weak