Macro Chapter 35 assignment questions

A decrease in the reserve requirement causes the size of the monetary multiplier to

increase, the amount of excess reserves in the banking system to increase, and the money supply to increase.

The two conflicting goals facing commercial banks are:

profit and liquidity.

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. The bank sells $15,000 in securities to the Federal Reserve Bank in its district, receiving a $15,000 increase in reserves in return. What amount of excess reserves does the bank now have?

$15000

Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. Households deposit $20,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

$18000

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

$20 billion

Suppose that Serendipity Bank has excess reserves of $12,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, how much does the bank hold in actual reserves?

$42,000

a. If the required reserve ratio is 50 percent, what is the monetary multiplier? b. If the monetary multiplier is 20, what is the required reserve ratio?

2 5%

True or False. "Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced."

False, because a checkable deposit in a commercial bank is also part of the money supply.

Suppose the assets of the Silver Lode Bank are $250,000 higher than on the previous day and its net worth is up $40,000. By how much and in what direction must its liabilities have changed from the day before?

Liabilities increased by $210,000 assets = liabilities + net worth

True or False. "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed."

True, lending increases the money supply, but repayment reduces checkable deposits, which lowers the money supply.

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Using the table above, show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount by inserting the new values into the gray shaded cells of the given table. b. By how much has the money supply changed? c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2' by inserting the new values into the gray shaded cells of the given table. d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make? $ Show in columns 3 and 3' how the bank's balance sheet will appear after the bank has lent this additional amount. Add the new values into the gray shaded cells of the given table. By how much has the money supply changed? $ How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above. Add the new values into the gray shaded cells of the given table.

a. a. The first step is to calculate required reserves. This equals the product of the required reserve ratio (decimal form) and checkable deposits. Required reserves = 0.20 × $100,000 = $20,000. The second step is to calculate excess reserves. This equals actual reserves minus required reserves. Excess reserves = actual reserves - required reserves = $27,000 - $20,000 = $7,000. This is the maximum amount of new loans that the bank can make. After making a loan of $7,000 (excess reserves), loans will increase by $7,000. There is no change in reserves initially (checks have not been drawn against the loan yet) or securities. Once the bank makes the loan, it will also credit the borrower's account (checkable deposits) equal to the value of the loan. Thus, checkable deposits will increase by $7,000.$7,000.b. The immediate effect is an increase in the money supply by $7,000. Checkable deposits have increased by $7,000. (Note that we have not worked through the monetary multiplier yet, so this is the immediate effect of the transaction.)$7,000.c. After checks are drawn against the loan, checkable deposits will fall by $7,000 (the amount of the loan) and reserves will fall by $7,000 (the amount of the loan) after the checks clear.Assets (1' ) (2' )Reserves [27,000] [27,000] [20,000]Securities [38,000] [38,000] [38,000]Loans [35,000] [42,000] [42,000]Liabilities and net worth (1' ) (2' )Checkable deposits [100,000] [107,000] [100,000]d. Answer questions a, b, and c on the assumption that the reserve ratio is 15 percent. For part a, the first step is to calculate required reserves. This equals the product of the required reserve ratio (decimal form) and checkable deposits. Required reserves = 0.15 × $100,000 = $15,000. The second step is to calculate excess reserves. This equals actual reserves minus required reserves. Excess reserves = actual reserves - required reserves = $27,000 - $15,000 = $12,000. This is the maximum amount of new loans that the bank can make. After making a loan of $12,000 (excess reserves), loans will increase by $12,000. There is no change in reserves initially (checks have not been drawn against the loan yet) or securities. Once the bank makes the loan it will also credit the borrower's account (checkable deposits) equal to the value of the loan. Thus, checkable deposits will increase by $12,000.$12,000For part b, the immediate effect is an increase in the money supply by $12,000. Checkable deposits have increased by $12,000. (Note that we have not worked through the monetary multiplier yet, so this is the immediate effect of the transaction.) For part c, after checks are drawn against the loan, checkable deposits will fall by $12,000 (the amount of the loan) and reserves will fall by $12,000 (the amount of the loan) after the checks clear.$12,000Assets (1' ) (2' )Reserves [27,000] [27,000] [15,000]Securities [38,000] [38,000] [38,000]Loans [35,000] [47,000] [47,000]Liabilities and net worth (1' ) (2' )Checkable deposits [100,000] [112,000] [100,000]

a. A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves because b. The monetary multiplier is defined as c. The monetary multiplier is

a. one bank loses reserves to other banks, but the banking system as a whole does not. b. 1/R, where R is the required reserve ratio. c. inversely related to the reserve ratio.

a. An asset on a bank's balance sheet is something b. Net worth is equal to c. A balance sheet must always balance because d. The major assets on a commercial bank's balance sheet include e. The major claim on a commercial bank's balance sheet is

a. owned by the bank, whereas a liability is something owed by the bank. b. assets - liabilities. c. the sum of assets must equal the sum of liabilities plus net worth. d. reserves, securities, loans, and vault cash. e. checkable deposits.

a. The Federal Reserve requires commercial banks to have reserves because b. Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because c. Excess reserves are equal to d. Excess reserves

a. reserves provide the Fed a means of controlling the money supply. b. these funds are cash belonging to commercial banks, but they are a claim that commercial banks have against the Federal Reserve Banks. c. actual reserves - required reserves. d. can be lent out, thereby increasing the money supply.

a. The banking system in the United States is referred to as a fractional reserve banking system because b. In a fractional reserve system, deposit insurance

banks hold a fraction of deposits in reserve. guarantees that depositors will always get their money, thus avoiding most bank runs.

a. True or False. Leverage increases the total size of the gain or loss from an investment, not just the percentage rate of return on the part of the investment amount that was not borrowed. b. Lowering leverage would make the financial system __________ stable.

false more

a. Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. This is because b. By issuing loans in the form of gold receipts, there was additional risk because

they knew that the gold receipts could be exchanged for gold. goldsmiths could issue more receipts than they had in gold and this could create a panic.

The actual reason that banks must hold required reserves is:

to give the Fed control over the lending ability of commercial banks.