Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 14, Problem 6P
To determine
Effect of required ratio on the money multiplier.
Introduction:
Money multiplier is the amount of money generated by all the commercial banks with each unit reserves. It is simply the reciprocal of the required reserve ratio.
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During the Great Depression years from 1930 to 1933,both the currency ratio c and the excess reserves ratio erose dramatically. What effect did these factors have onthe money multiplier?
ou just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar.
If the reserve requirement is 1212%, how much will your deposit increase the total value of checkable bank deposits?
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If the reserve requirement is 44%, how much will your deposit increase the total value of checkable deposits?
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Increasing the reserve requirement
the money supply.
You take $100 you had kept under your mattressand deposit it in your bank account. If this $100stays in the banking system as reserves and if bankshold reserves equal to 10 percent of deposits, byhow much does the total amount of deposits in thebanking system increase? By how much does themoney supply increase?
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- Suppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $400 billion is necessary. What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.1. Buy government securities. O Increase the interest paid on bank reserves. Increase the reserve ratio. Sell government securities. Calculate the change in reserves necessary to achieve the $400 billion increase. $ billionarrow_forwarda. Distinguish between legally required reserves and excess reserves. b. Why don’t banks hold a 100 percent reserves? How is the amount of reserves bank hold related to the amount of money the banking system creates? c. Define the term money multiplier? d. Assume that Lucky Bank is required to hold a 10% deposits as reserves, and there is a $3000 increase in demand deposits. Calculate the money multiplier? How much additional new demand deposits couldthe $3,000 deposit support?arrow_forward12)Assume the banking system has $100 billion in demand deposits and $10 billion in reserves. In addition, assumethat the required reserve ratio is 5%. Answer the following questions:a) How much excess reserves are in this system?b) What is the value of the money multiplier?c) What is the maximum amount of change in demand deposit creation that could take place if the bankingsystem lent out all of its excess reserves.arrow_forward
- Which volume of OMOs is required to keep money supply unchanged, if demand for borrowedreserves increases by $0.5 trillion and the central bank decreases required reserves ratio from 10 to7% (the volume of required reserves created by the banking system was 1.5 trillion)? Use the conceptof a money multiplier and currency ratio of 0.2 and excess reserves ratio of 0.03.arrow_forwardAssume that the balance sheet of a bank in your assigned country as below:Assets LiabilitiesReserves $5,000 Deposits $40,000Loans $45,000 Capital $10,000a. If the required reserve ratio is 3 percent, then how much does this bank has excessreserves?b. Suppose a bank purchases $1,500 of government securities using funds from reserves.How much do bank assets change as a result of this transaction? Show the change inthe balance sheet above. How much does Money Supply change due to this transaction?c. Calculate the bank’s leverage ratio. What is the maximum decrease (in %) in the marketvalue of assets before the bank becomes insolvent?arrow_forwardSuppose the total reserves held by banks amount to R13.09 million. Banks hold R1 in excessreserves for every R10 of required reserves held and the required reserve ratio (r) is 8.5%. Thetotal amount of currency = R60 million. Calculate the amount of required reserves, and totalamount of deposits held by banks, and the total amount of money supply in the system.arrow_forward
- . Suppose that the T-account for Nan Bank Inc. is as follows:Assets LiabilitiesReserves $100,000Loans $400,000 Deposits $500,000. If the Bank of Canada requires banks to hold 5 percent of deposits reserves, how much in excess reserves does Nan Bank Inc. now hold?Assume that all other banks hold only the required amount of reserves. IfNan Bank Inc. decides to reduce its reserves to only the required amount, byhow much would the economy's money supply increase?arrow_forwardIn 2007-08, the financial crisis led money multiplier to and the money supply to which would cause the excess reserves ratio to and depositors are likely to their holdings of currency. O decrease; decrease: increase; increase O increase; increase; decrease; decrease: decrease; increase; decrease: increase; O increase; decrease; increase; decrease; « Previous Next Quiz saved at 9:26am Submit Quizarrow_forwardc. Define the term money multiplier? d. Assume that Lucky Bank is required to hold a 10% deposits as reserves, and there is a $3000 increase in demand deposits. Calculate the money multiplier? How much additional new demand deposits couldthe $3,000 deposit support?arrow_forward
- 2. Suppose that the required reserve ratio is 8% (i.e. rr = RR = 0.08), banks hold 5% of checking ER account deposits as excess reserves (i.e. e = = 0.05), and the currency-to-deposit ratio is 0.5 (i.e. c= = 0.5). a. Use this information to calculate the money multiplier. b. How would your answers to part (a) change if banks become concerned about risks inxolved in making loans and now choose to hold 20% of checking account deposits as excess, reserves (e=0.20)? Compute the new value of the money multiplier. c. Starting from part (a) what happens to money multiplier if people decide to hold more CUTTENCY, resulting in an increase in currency-deposit from c 0.5 to c 0.8? d. If the Fed conducts open market operations and buys $100 million in Treasury bonds from banks, what will happen to money supply using the multipliers in part (a), (b), and part (c)?arrow_forwardSuppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $400 billion is necessary. What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.1 OIncrease the reserve ratio. O Buy government securities. Increase the interest paid on bank reserves. Sell government securities. Calculate the change in reserves necessary to achieve the $400 billion increase billionarrow_forwardAssume that a bank receives a deposit of $1,000 in cash, puts aside $200 as required reserves, and makes a loan of $800, these transactions imply that: O the money supply by the whole banking system can increase by $1,000. O the money supply by the whole banking system can increase by $4,000. the money supply by the whole banking system can increase by $8,000. O the money supply by the whole banking system can increase by $5,000.arrow_forward
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