Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 25, Problem 6.4P
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The pandemic has impacted the use of currency in our economy. Explain in your own words, how the changes in the use of currency would affect the monetary base in the banking system, while holding all other factors constant.
The initial condition of the banking system is as follows: $500 billion in reserve, $4,500 billion in loans and investments, and 5,000 billion in deposits. The required reserve is 10%. The Fed buys $100 billion government securities using open market operation, and lowers the reserve requirement to 5%. The banking system converts 85% excess reserves to loans, but borrowers return only 65% of these funds to the banking system as deposits. What is the maximum amount of loans in the banking system as a result of such Fed operation?
Banks acquire $50 billion in new reserves, and the reserve requirement ratio is 6%. What will be the impact on the total deposits in the system, assuming all excess reserves are loaned to borrowers and the public redeposits all the borrowed funds in the banking system?
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Principles of Economics (12th Edition)
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- The table shows the commercial banks' balance sheet (aggregated over all the banks). The commercial banks' desired reserve ratio on all deposits is 10 percent and there is no currency drain. Calculate the bank's excess reserves. >>> Answer to 2 decimal places. The banks' excess reserves are $11 million. If the banks use all of these excess reserves to make loans, what is the quantity of loans? The quantity of loans will be $11 million. If the banks use all of the excess reserves to make loans, what is the quantity of total deposits immediately after the banks have made the loans? The quantity of total deposits immediately after the banks have made the loans is $ ☐ million. Assets Liabilities (millions of dollars) Reserves at the Fed 25 Checkable deposits 120 Cash in vault Securities Loans 5 Savings deposits 70 40 120arrow_forwardAn institution that oversees the banking system and regulates the money supply is known as central bank treasury congress the securities and exchange commissionarrow_forwardGive one policy that can complement the reserve requirement in expanding credit in the banking industry considering the peculiarities of rural and savings banks.arrow_forward
- A commercial bank has actual reserves of $29,000 and checkable-deposit liabilities of $35,000, and the required reserve ratio is 0.05. This bank can loan out $____ at the moment.arrow_forwardExplain how the monetary policy influences banks' lending behavior. Show how an open market purchase affects the banking system's balance sheet, and discuss the impact on the supply of bank loans.arrow_forwardThe Fed can put more reserves into the banking system by: 1) Purchasing government securities 2) Increasing the discount rate 3) Selling government securities 4) Lending to nonbanksarrow_forward
- Below is a short version of the balance sheet at Wells Fargo. Assume this bank has a 15% reserve requirement. Wells Fargo Assets Liabilities Total Reserves $250,000 Deposits $100,000 1. What is the maximum this bank can lend out? $ 2. Mr. Smithers decides to withdraw $25,000 from his checking account here after which the bank will now make $45,000 in loans and purchase $14,000 in securities from the Fed. After all these transactions take place, answer the following questions. (Enter your response rounded to the nearest whole number). a. The bank now has Total Reserves in the amount of $☐ b. The bank now has Required Reserves in the amount of $ c. The bank now has Excess Reserves in the amount of $ d. The bank is now limited to making additional loans up to the amount of $ e. The value of the simple money multiplier is (round to just 1 decimal) f. Should this bank lend its entire remaining reserves, the banking system can see an increase in the money supply of $arrow_forwardThe Bank of Canada sets the reserve requirement, which banks must meet through deposits at the Bank of Canada and cash held at the bank. What do these requirements achieve? Check all that apply. They help to facilitate transfers of funds between banks when a customer from one bank writes a cheque to a customer of another. They help to control the money supply. They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash. They mean that a bank must have one dollar of deposits for every dollar it lends.arrow_forwardSuppose that you are in an economy with reserve requirements are equal to 11%, and cash drain is equal to 3%. One bank in this economy now recieves an addition $300 of new deposits. What is the total quantity of new bank desposits that this will generate across the entire banking system (in dollars)? Note: round all answers to two decimal places. Do not include currency signs in your answer.arrow_forward
- You take $500 that you held as currency and put it into the banking system. The reserve ratio is equal to 20%. Calculate the money multiplier. By how much will increase the total amount of deposits in the banking system? By how much will increase the money supply?arrow_forwardSuppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5%. How much maximum of new money will be created (maximum amount of new checking deposits created by the banking system) as a result of your bank deposit? Hint: do not count your initial deposit as part of increase. Number $70000 ☐ ☐ Incorrect. The bank can only loan out excess reserves. Calculate the excess reserves after the lottery winnings were deposited, than multiple that number by the money multiplier. Which events could cause the increase in the money supply to be less than its potential? Check all that apply. Some loan recipients choose to hold some cash instead of depositing all of it in banks. All money loaned out is deposited back into the banking system. Banks decide to keep some excess reserves on hand. Banks choose to loan out all excess reserves.arrow_forwardIf the Bank of Canada performs an Open-Market-Sale with a member of the public, what is the effect on the banking system and the money supply? The banking system has fewer reserves, and the money supply tends to grow. The banking system has more reserves, and the money supply tends to fall. The banking system has more reserves, and the money supply tends to grow. The banking system has fewer reserves, and the money supply tends to fall.arrow_forward
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