Chapter 15 Homework
The Federal Reserve requires commercial banks to have reserves because
reserves provide the Fed a means of controlling the money supply.
Excess reserves
can be lent out, thereby increasing the money supply.
The major claim on a commercial bank's balance sheet is
checkable deposits
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
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.
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
one bank loses reserves to other banks, but the banking system as a whole does not.
An asset on a bank's balance sheet is something
owned by the bank, whereas a liability is something owed by the bank.
The two conflicting goals facing commercial banks are
profit and liquidity
The major assets on a commercial bank's balance sheet include
reserves, securities, loans, and vault cash.
A balance sheet must always balance because
the sum of assets must equal the sum of liabilities plus net worth.
Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because
these funds are cash belonging to commercial banks, but they are a claim that commercial banks have against the Federal Reserve Banks.
A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?
$2 million
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
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?
$4,000
Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?
(100,000-20,000) so increased by $80,000
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?
(required would be $150,000 x 0.20 so actual is that answer plus the $8,000 excess) answer is $38,000
The monetary multiplier is defined as
1/R, where R is the required reserve ratio
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
Net worth is equal to
assets - liabilities.
The banking system in the United States is referred to as a fractional reserve banking system because
banks hold a fraction of deposits in reserve.
In a fractional reserve system, deposit insurance
guarantees that depositors will always get their money, thus avoiding most bank runs.
The monetary multiplier is
inversely related to the reserve ratio.
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.
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.
Excess reserves are equal to
actual reserves - required reserves.
