MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 12, Problem 3DQ
To determine
To describe: The fractional reserve banking creation over the large money supply and the reasons for making the banks vulnerable to run.
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Students have asked these similar questions
Suppose Adrienne receives a payment in cash of $400 and she deposits it in a bank.
i. If the banking system is 100 percent reserve, how does the money supply change?
i. If the reserve requirement is 10 percent and the bank holds no excess reserve, how does the money supply
change?
in. If the reserve requirement is 10 percent and the bank holds an excess reserve of 2 percent, how does the
money supply change?
iv. Now suppose the reserve ratio is 25 percent. How much money can be created
from $100 of reserves? Show your work.
Suppose all banks have zero excess reserves. The Fed buys bonds for $1 million and a bond dealer deposits the check in his or her bank. The required reserve ratio
is 15 percent. The bank loans out the maximum it is allowed to a local business. The business writes a check for the full amount for supplies, which is then
deposited in another bank. The largest loan the second bank can make is:
The largest loan the second bank can make is $. (Round your answer to the nearest dollar.)
What steps can the Federal Reserve take to increase the money supply?
a) The Federal Reserve can reduce personal income tax rates to encourage households to spend more money
b) The Federal Reserve can require all banks to close by 4:00 pm on weekdays and remain closed on weekends.
c) The Federal Reserve can increase reserves requirements for banks
d) The Federal Reserve and raise the discount
e) The Federal Reserve can buy US Treasury securities
e) The Federal Reserve
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Similar questions
- What are the three tools of the Federal Reserve? Explain how each can be used to increase the money supply.arrow_forwardWhich of the following is the role of the Federal Reserve System? Select one: a. Set the Required Reserve Ratio for Bank of America b. Manage the account for South Carolina and other state governments c. Make loans to local businesses d. Print new money e. All of these are roles of the Fedarrow_forwardAccording to Reuters, the People’s Bank of China hasbeen using targeted increases in banks’ reserve requirement ratios (RRR) in recent months. Explain why centralbanks impose reserve requirements for commercial banks.Why do commercial banks try to avoid this requirement?arrow_forward
- Part 2 hand written plzz The Federal Reserve sells $26.00 million in Treasury securities. If the required reserve ratio is 10.00%, and all currency is deposited into the banking system, and banks hold excess reserves of 10%, then the maximum amount the money supply can decrease is $ million. (Insert your answer in millions, and round your answer to two decimal places.)arrow_forwardThe banking system has $5,000 in reserve, $45,000 in loans, and $50,000 in deposits. Currently the reserve requirement is 10%. If the Fed lowers reserve requirement to 5%, the banking system converts 75% excess reserves to loans, but borrowers return only 60% of these funds to the banking system as deposits. What is the maximum amount of loans the banking system could make?arrow_forwardWhy does the Fed seldom use the other two tools (discount rate and reserve requirements) as a way to control the money supply?arrow_forward
- In a system of “fractional reserve banking” such as ours, banks have the ability to create (and destroy) money. Explain how banks have the ability to create money by assuming Bank A takes in a $10,000 deposit. (Make up your own numbers as needed.) In part a, what was the reserve to deposit ratio used? How does the size of the reserve to deposit ratio affect how much money a bank can create out of a $10,000 deposit?arrow_forwardSuppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. Instructions: Enter your answer as a whole number. If the reserve ratio is 20 percent, what is the size of the bank's actual reserves?arrow_forwardMoney and Banking Economics: Evaluate the following statement: "The Federal Reserve can perfectly control the size of the money supply"arrow_forward
- The task I am struggling with: Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. The reserve ratio is 10%. a) how dies the deposit initially change the T-account of the local bank? How does it change the money supply? b) If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit? c) if every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy´s initial cash deposit of $500? Thank you very much for your help.arrow_forwardsuppose the required reserve ratio is 30%. How much can the entire banking system loan out? 2. if the entire amount of excess reserves were loaned out, what would happen to Money supply? 3. Now suppose the required reserve ratio was raised to 40%, and assume all excess reserves are lent out, what is the maximum amount of money the banking system could lend? 4. using the same situation as in “c”, suppose now that an entity, bought $1 T worth of bonds from the banking system. What is your answer to “c”?arrow_forwardThe Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank and that currency is added to reserves.(Please note I already have part 1 answered. If you could just help me with the rest that would be great.)( ALSO note that I have included the graph/table it is attached as a image) Recall, to calculate checkable deposits you have to add the original checkable deposits to the new deposit. To calculate required reserves for the deposits, you have to multiply the required reserve ratio (decimal from) by checkable deposits. To calculate excess reserves, you will subtract required reserves from actual reserves. Part 1: What level of excess reserves does the bank now have? (20,000+5,000)-21,000=4,000 is the amount of excess reserve. Part 2: Complete the table below for the Third National Bank. You have to distinguish between a bank's assets and bank's liabilities. The figures in…arrow_forward
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