Economic Unit 4 chapter 10 B

Micro Bank has the simplified balance sheet below: Assets Liabilities Reserves $20,000 Demand Deposits $150,000 Loans $100,000 Owners Equity $0 Gov Bonds $30,000 Use the above table to calculate the maximum possible change in loans for this bank if the reserve ratio is 10%. HINT: On the above balance sheet, the reserves include both required and excess reserves. Since demand deposits are $150,000, 10% of $150,000 equals $15,000. Therefore, there will be $______ in excess reserves for this bank ($20,000 - $15,000).

$5,000

Using the information in the table, calculate the demand deposits possible if this bank complies with a reserve ratio of 20% and maintains no excess reserves. Assets Liabilities Reserves $25,000 Demand Deposits __________ Loans _______ Gov Bonds _______ HINT: If the reserve ratio is 20%, then 1/5 of the deposits must be held as required reserves. $25,000 is 1/5 of $_______. $25,000/$_______ = 1/5, which equals 20%.

$125,000

Which of the following is trust of the quantity of money demanded?

if falls when interest rates rise, because the opportunity cost of holding money increases

Under a fractional reserve banking system, banks are required to

keep part of their demand deposits as reserves

banks create money by

lending excess reserves that get redeposited in other banks

If the reserve ratio was set at 100%, then banks could: HINT: Banks are only able to lend their excess reserves.

make no loans

If a bank customer deposits $1,000 of circulating currency into her demand deposit, what will be the immediate effect on M1? HINT: M1 is the total of circulating currency and demand deposits. Since the circulating currency was deposited into a demand deposit, circulating currency decreased by $1,000, and demand deposits increased by $1,000.

no change

The opportunity cost of holding money refers to: HINT: Opportunity cost refers to a foregone opportunity. In this case, it is the opportunity to earn interest on an interest-bearing asset such as a bond. When you hold money, you are giving up the opportunity to earn interest on something else you could hold instead.

the interest that could have been earned if the money balances had been changed into an interest-bearing asset

The money demand curve illustrates the relationship between the interest rate and: HINT: Economists use the demand curve for money to illustrate the inverse relationship between the quantity of money demanded and the interest rate. It depicts how much money is demanded at each interest rate.

the quantity of money demanded

If, upon receiving a checking deposit of $600, a bank's excess reserves increased by $510, the required reserve ratio must be: HINT: This means the RR is $90. $90/$600 x 100 = __

15%

Which of the following measures of the money supply is largest? HINT: The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits (checkable deposits), and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M2 is therefore the largest measure of the money supply. M2 incorporates all the other answers listed.

M2

People's attitudes about the trade-off between risk and return affect how much of their wealth people hold as money. Heightened fear will lead to: HINT: The greater the fear of loss, the less people will want to hold investments that could suffer a loss, and therefore the higher the demand for money (cash and checking accounts).

an increase in the demand for money

Liabilities, by definition, mean what is owed, not owned. Which of the following would be included as a liability on a commercial bank's balance sheet?

demand deposits

All of the following are components of the money supply in the United States EXCEPT: HINT: The U.S. currency is a "fiat currency", which means its value is not backed by a commodity. Thus, gold bullion (a commodity) is not a part of the money supply, even though it is WORTH money. Every other choice listed here is a more direct form of money, and is a component of the money supply.

gold bullion