Economics-Quiz chapter 29
Cont of explanation of picture, above
***the loans assets should be $0 not $100
Which of the following actions by the federal reserve would reduce the money supply?
An increase in the interest rate paid on reserves. ( an increase in the interest rate paid on reserves would reduce the money supply. The more interest banks receive on reserves, the more incentive they have to hold on the reserves rather than make loans, and the lower the reserve ratio. A lower reserve ratio means to lower money money multiplier and,in turn, a lower money supply.
2.Chole takes $100 of currency from her wallet and deposits it into her checking acct. if the bank adds the entire $100 to reserves, the money supply,------, but if the bank lend out some of the $100, the money supply-----.
Is unchanged, increases. (Depositing money into a bank reduces currency and increases demand deposit by equal amounts. If the bank keeps this entire deposit as part of its reserves, the $100 deposit has no effect on the money supply. However, if the bank lends a portion of the deposit-say $10-that portion now exists both as a demand deposit and as currency, thereby increasing the money supply.
1.The money supply include all of the following except
Lines of credit acessible with credit cards. (The money supply includes currency (paper bills and coins) and demand deposits (balance in bank accounts accessible by personal check or debit card), but not lines of credit accessible with credit cards.
In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hod-----currency or if banks choose to hold---------excess reserves.
More, more. (The more money households hold (and thus the less they deposit), the less reserves banks have the less money the bank system can create. Similarly the more excess reserves banks choose to hold, the fewer loans they make, and the less money the banking system can create.
If the reserve ratio is 1/4 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increase by
Use the same formula as above
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets decline by 10 percent, then it capital will be reduced to...
=$100 (The leverage ratio is the ratio of the bank's total assets to bank capital. When assists by a given percentage, the value of the capital declines by that amount times the leverage ratio. In this case, 10 percent times a leverage ratio 5 means a 50% decline in capital or $200-(0.5x$200)=$100
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to
=$100 (The same answer from above)
3.If the reserve ratio is 1/4 and the central bank increases the quantity of reserves in the banking by $120, the money supply increases by?
So any amount in the reserve is the money multiplier, so then use the reciprocal to find out how much it will increase $120 x 4/1=$480 (The amount of money the banking system generates with each dollar of reserves is called the money multiplier, which is the reciprocal of the reserve ratio is 1/4, the money multiplier is equal to 4, and a $120 increase in reserves will increase the money supply by $120x4=$480.
