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.