MACRO CH15

The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent. 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′.

c. The new balance sheet after the new loans clear is given below :

The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent. d. Answer questions a, b, and c again, on the assumption that the reserve ratio is 15 percent.

d. The maximum amount of loan that a bank could make will be $7000. The balance sheet changes due to a change in CRR to 15%. The money supply will increase by $7000. The new balance sheet when new loans get cleared when CRR=15%:

The two conflicting goals facing commercial banks are:

profit and liquidity

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

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

2/5. Goldsmith's gold holdings are a 2/5 fraction of the paper money he has issued.

What is the difference between an asset and a liability on a bank's balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank's balance sheet?

An asset is something of value that is owned by the bank and can be used to produce something, while a liability is a debt or something the bank owes. Net worth is the difference between asset value and liability. The balance sheet always balances because of the double-entry method of accounting practiced, and assets always equal liabilities plus net worth. Cash in hand, reserves, and property owned are major assets, and outstanding stock and checkable deposits are major claims on a commercial bank's balance sheet.

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

Canada

Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply?

Decreased

Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up to $20,000. By how much and in what direction must its liabilities have changed from the day before?

Due to the increase in assets and net worth, the liabilities have increased to $80,000.

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by the bank? What is the significance of excess reserve?

Federal Reserve requires commercial banks to have reserves against their checkable deposits. Reserves help banks earn interest, so it is an asset for commercial banks. Reserves are a liability as they require interest payment from Federal Reserve Bank. Excess reserves are additional reserves over and above the required reserves. It can be calculated by finding the difference between the actual reserves and the required reserves. Interest is paid on these required reserves and also the excess reserves banks held at the Fed. Keeping reserves high helps to maintain trust with the public.

Why is the banking system in the United States referred to as a fractional banking reserve system? What is the role of deposit insurance in a fractional reserve system?

In the US banking system, the value of reserves with the central bank is only a fraction of the actual money in supply. Thus it is called a fractional reserve system. The role of deposit insurance is to safeguard the interests of the depositors during situations when banks go bankrupt.

Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?

Merchants accepted gold receipts as payment for its safety and convenience aspect. The gold receipts payment system introduced the risk of default.

"Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced". Do you agree? Explain why or why not.

One cannot agree with the given statement. Whenever a currency is deposited in a commercial bank, the total supply of money increases by the process of the money multiplier.

Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, how much does the bank hold in actual reserves?

The actual reserves of Serendipity Bank would be $38,000.

Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

The excess reserves of Third National Bank would be $4000.

Suppose again that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. What amount of excess reserves does the bank now have? By what amount does your answer differ (yes, it does!) from the answer to problem 3?

The excess reserves will be $5000. The answer from problem 3 differs by $1000.

Explain why 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. What is the monetary multiplier, and how does it relate to the reserve ratio?

The individual banks can extend loans only equal to their excess reserves because the reserves are lost by one bank to the other. On the other hand, there is no loss of reserves in the banking system on extending loans. It can increase the lent amount by multiple of its excess reserves. The monetary multiplier shows the relationship between the reserves and new money created. It is inversely related to the ratio that determines the required reserves.

Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering leverage make the financial system more stable?

The leverage increases the total size of profit or loss from an investment. If leverages are lowered in the financial system, neither the profit nor the loss will be too high to create a financial imbalance, and the system would be more stable.

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

The loans increase the checkable deposits and create money, whereas paying off the loans reverses the cycle and destroys the money.

If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

The money multiplier at 10 percent required ratio is 10. The required reserve ratio is 0.25 when the money multiplier is 4.

The actual reason that banks must hold required reserves is:

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

How would a decrease in the reserve requirement affect the (a) size of the monetary multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?

a. Increase in the size of the monetary multiplier. b. Increase in the ratio of excess reserves. c. Increase in the extent of the money supply expansion via loans.

The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank's balance sheet will appear after the bank has loaned this additional amount.

a. The bank can make a maximum of $2000 of new loans. The columns (1) and (1') below show the changes.

The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent. b. By how much has the money supply changed?

b. The money supply will increase by $2000.

A single commercial bank in a multibank banking system can lend only an amount equal to its initial pre-loan ______________.

excess reserves.