Ch 14 Money & Banking
Calculate the value of the money multiplier in each of the following situations: Banks hold no excess reserves, the required reserve ratio is 100%, and households and firms hold currency and deposits in equal amounts The value of the money multiplier is ___.
- 1
The required reserve ratio is 0, banks hold reserves equal to the value of their deposits, and households and firms hold half as much in currency as in deposits. The value of the money multiplier is ___.
- 1
The required reserve ratio is 0, households and firms hold three times as much in currency as in deposits, and banks hold reserves equal to three-quarters the value of their deposits. The value of the money multiplier is
- 1.07
Use a T-account for Bank of America and a T-account for the Fed to show the result of the Fed buying $11 million in Treasury bills from Bank of America. (Enter your responses as integers. Include a minus sign to indicate a negative change, but do not include a plus sign for a positive change.)
- Bank of America Securities: -$11 million Reserves: $11 million - Federal Reserve Securities: $11 million Reserves: $11 million
Explain whether you agree with the following observation: "Since March 2020, the required reserve ratio has been equal to 0, therefore any increase in the monetary base can lead to an infinite increase in the money supply."
- Disagree. If the required reserve ratio equaled zero, the simple deposit multiplier would equal infinity, implying that multiple deposit expansion would go on forever. However, the realistic money multiplier, which includes currency and excess reserve holdings, would not equal infinity even if the required reserve ratio equaled zero.
The Fed carries out a $2 billion open market sale.
- Discount Loans, an asset, decreases by $2 billion. - Reserves, a liability, decreases by $2 billion.
The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from DeShawn's Computer Services for $1 million.
- Discount Loans, an asset, increases by $1 million. - Reserves, a liability, increases by $ 1 million.
Use T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking system. The Fed increases discount loans by $2 billion.
- Discount Loans, an asset, increases by $2 billion. - Reserves, a liability, increases by $2 billion.
Why would the Fed's buying Treasury securities and mortgage-backed securities keep "financial market conditions easy"?
- It increases bank reserves, resulting in lower interest rates, making it easier to borrow and spend in the economy.
what is the simple deposit multiplier?
- It is the ratio of the amount of deposits created by banks to the amount of new reserves.
What was the effect on banks of the Fed's decision to increase the required reserve ratio? Increasing the required reserve ratio
- It lowered the money multiplier. - It reinforced monetary contraction.
What effect did these changes have on the size of the money multiplier?
- It was erratic until 2015, after which the decrease in ER/D was significantly larger than the decrease in C/D, causing the value of the money multiplier to rise.
What is the likeliest explanation for why the arrival in Argentina of the Covid-19 pandemic resulted in an increase in the country's monetary base?
- Its central bank was likely purchasing large amounts of government securities, causing its balance sheet to expand.
Suppose that Wells Fargo lends $152,000 to Jamal's Jerseys. Using T-accounts, show how this transaction is recorded on the bank's balance sheet.
- Loans: $152,000 - Checkable deposits: $152,000
What does Meltzer mean by "potential monetary and credit expansion"?
- Meltzer was referring to the multiple deposit creation process
If Jamal's spends the money to buy materials from Zach's Zippers, which has its checking account at PNC Bank, show the effect on Wells Fargo's balance sheet
- Reserves: -$152,000 - Checkable deposits: -$152,000
Suppose that PNC Bank sells $19 million in Treasury bills to the Fed and then makes a $19 million loan to David's Donut Emporium and Boat Repair. Use a T-account to show the results of these transactions on PNC's balance sheet.
- Securities: -$19 million - Loans: $19 million
If the Fed cuts the required reserve ratio from 20% to 18%, calculate the change in the value of the simple deposit multiplier.
- The simple deposit multiplier would increase by 0.56. Reason: 1/20% = 5 1/18% = 5.56 5.56-5 = .56
Why would these asset purchases cause the Fed's balance sheet to rise?
- The size of the Fed's balance sheet is usually based on the value of the Fed's total assets.
What is the total change in Wells Fargo's assets and liabilities?
- The total change in assets is zero, with an additional $152,000 in loans and a loss of $152,000 of reserves. The total change in liabilities is zero, with the $152,000 checking account being spent.
Why might banks in the mid-1930s have been holding reserves for "reasons of safety"?
- They were holding reserves to guard against bank runs.
Briefly explain what happened to the currency-to-deposit ratio (C/D) and the excess reserves-to-deposit ratio (ER/D) after the financial crisis of 2007-2009 and before the Covid-19 pandemic in 2020.
- The currency-to-deposit ratio (C/D) trended downward and the excess reserves-to-deposit ratio (ER/D) was erratic until 2015, after which it decreased until the Covid-19 pandemic in 2020.
Did the Fed's asset purchases also cause the monetary base to rise?
- Yes, because the asset purchases would have increased reserves or currency in circulation.
If banks were holding excess reserves for reasons of safety, why might the Fed's staff have been overestimating potential monetary and credit expansion?
The Fed assumed that banks would loan out these excess reserves.
The U.S. Mint describes the demand for the gold, silver, and platinum coins it produces as being dependent on the prices of these metals as commodities. In addition, the Mint notes: "These commodity prices are, in turn, dependent on variables such as . . . [1] perceived strength as a safe-haven asset . . . and [2] earnings potential from other commodities or investments." Briefly explain whether these two factors help account for the surge in demand for gold coins in 2020.
The more these metals are perceived as safe-haven assets, the more investors will want to purchase them during uncertain times, like those experienced during the Covid-19 pandemic. As the earnings potential from other commodities or investments increases, the demand for these precious metals will likely decrease.