Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $20 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 1.00 percent, the Fed has to reduce the interest it pays on bank reserves. If the Fed reduces the interest it pays on reserves to 0.50 percent, the equilibrium federal funds rate will equal percent but it has to supply additional reserves of market operations. billion dollars to commercial banks through open

Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $20 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 1.00 percent, the Fed has to reduce the interest it pays on bank reserves. If the Fed reduces the interest it pays on reserves to 0.50 percent, the equilibrium federal funds rate will equal percent but it has to supply additional reserves of market operations. billion dollars to commercial banks through open

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter25: Money, Banking, And The Federal Reserve System

Section: Chapter Questions

Problem 4P

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Similar questions

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How can a bank end up with negative net worth?
Round Deposits Required Reserves of 20% Excess Reserves New Loans None of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 $100 $400 $400 0 $400 2 $400 $80 $320 $320 0 $320 3 $320 $64 $256 $256 0 $256 4 $256 $51.20 $204.80 $204.80 0 $204.80 5 $204.80 $40.96 $163.84 $163.84 0 $163.84 6 $163.84 $32.77 $131.07 $131.07 0 $131.07 7 $131.07 $26.21 $104.86 $104.86 0 $104.86 8 $104.86 $20.97 $83.89 $83.89 0 $83.89 9 $83.89 $16.78 $67.11 $67.11 0 $67.11 10 $67.11 $13.42 $53.69 $53.69 0 $53.69 Totals $2231.57 $417.31 $1785.26 $1785.26 0 $1785.26 Calculate the new money supply. (Enter response here.) Calculate the money multiplier.
Round Deposits Required Reserves of 20% Excess Reserves New Loans 50% of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 $100.00 $400.00 $400.00 $200.00 $200.00 2 $200 $40 $160 $160 $80 $80 3 $80 $16 $64 $64 $32 $32 4 $32 $6.40 $25.60 $25.60 $12.80 $12.80 5 $12.80 $2.56 $10.24 $10.24 $5.12 $5.12 6 $5.12 $1.02 $4.10 $4.10 $2.05 $2.05 7 $2.05 $.41 $1.64 $1.64 $.82 $.82 8 $.82 $.16 $.66 $.66 $.33 $.33 9 $.33 $.07 $.26 $.26 $.13 $.13 10 $.13 $.03 $.10 $.10 $.05 $.05 Totals $833.25 $166.65 $666.60 $666.60 $333.30 $333.30 Calculate the new money supply. Calculate the money multiplier.
12 You work for the treasury department of a medium sized bank. You are concerned about liquidity risk since there is increased volatility in the market. Would you prefer to fund a 6-month corporate loan using a 180-day CD or via demand deposits? Why?
The following financial statement is for the current year. From the past, you know that 10% of fixed-rate mortgages prepay each year. You also estimate that 10% of checkable deposits and 20% of savings accounts are rate sensitive. Second National Bank Assets Liabilities Reserves $ 1,500,000 Checkable Deposits $ 15,000,000 Securities Money Market Deposits $ 5,500,000  1 Year $ 6,000,000 Savings Accounts $ 8,000,000 1 to 2 Years $ 8,000,000 CDs  2 years $ 12,000,000 Variables-rate $ 15,000,000 Residential Mortgages  1 Year $ 22,000,000 Variables-rate $ 7,000,000 1 to 2 Years $ 5,000,000 Fixed-rate $ 13,000,000  2 years $ 2,500,000 Commercial Loans Fed Funds $ 5,000,000  1 Year $ 1,500,000 Borrowings 1 to 2 Years $ 18,500,000  1 Year $ 12,000,000  2 years $ 30,000,000 1 to 2 Years $ 3,000,000 Buildings, etc. $ 2,500,000  2 years $ 2,000,000 Bank Capital $ 5,000,000 Total $100,000,000 Total $100,000,000 (a) What is the current Income GAP for Second National Bank? (b) What will…
Table 14.1: FIRST COMMERCIAL BANK Asset Liabilities Total Reserves: S150,000 $100,000 $1,000,000 $200,000 Deposits Net Worth Required Reserves Excess Reserves ? ? Loans $1,200,000 Total $1,200,000 Total 14. Refer to Table 13.1. First Commercial Bank's total loans equal S a) 1,050,000 b) 1,200,000 c) 1,150,000 d) 1,250,000
Fed Funds Rate 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0$ $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 $650 $700 $750 $800 Federal Funds ($Billions) Consider the above graph that shows demand for excess reserves by the banking system as a whole. Currently banks as a whole are holding an excess reserve of $350 billion. The graph indicates that the Fed is paying percent interest on bank excess reserves and that the equilibrium fed funds rate is percent. If the Fed reduces the interest on bank reserves to one percent, the equilibrium fed funds rate will equal percent.
Deposit Reserve Requirement Money Multiplier Potential Money Creation $1,000 10% From above $1,000 20% From above $1,000 25% From above With a deposit of $1,000 and the reserve requirement of 10% what is the potential money creation? Group of answer choices $5,000 none of the above $10,000 $4,000
Table 13.1: FIRST COMMERCIAL BANK Asset Liabilities S150,000 S100,000 Total Reserves: $1,000,000 $200,000 Deposits Net Worth Required Reserves ? Excess Reserves ? Loans $1,200,000 Total $1,200,000 Total 15. Refer to Table 13. 1. First Commercial bank's excess reserves equal $ a) 150,000 b) 250,000 c) 100,000 d) 50,000
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