ECON 110 Connect Homework 7 Money and Banks Monetary Policy Assignment solutions complete answers

ECON 110 Connect Homework 7 Money and Banks Monetary Policy Assignment solutions complete answers 

 

Question 1

 

What percent of the money supply depicted in the figure is transactions account balances plus traveler's checks?

Instructions: Round your response to one decimal place.

 

Question 2

 

How large a loan can Bank #2 in the figure above make?

 

Question 3

 

Instructions:
Round your response to two decimal places.
a. What volume of loans can the banking system in the figure support? 

b. If the reserve requirement were 50 percent rather than 75 percent, what would the system’s lending capacity be? 

 

Question 4

Suppose that a lottery winner deposits $5 million in cash into her transactions account at the Bank of America.

Assume a reserve requirement of 20 percent and no excess reserves in the banking system prior to this deposit.

Show the changes on the Bank of America balance sheet when the $5 million is initially deposited.

BANK OF AMERICA
Assets
Liabilities
Change in required reserves
 
million
Change in deposits
 
million
Change in excess reserves
 
million
 
 
 
Change in total reserves
 
million
 
 
 
 
 
 
 
 
 
 
 

Question 5

In December 1994, a man in Ohio decided to deposit all of the 8 million pennies he had been saving for nearly 65 years. (His deposit weighed over 48,000 pounds!)

With a reserve requirement of 7 percent, how did his deposit change the lending capacity of

a. his bank? 

b. the banking system? 

 

Question 6

Assume that the following data describe the current condition of the commercial banking system:

Value
 
Total reserves:
$180
billion
 
Transactions deposits:
$800
billion
 
Cash held by public:
$300
billion
 
Required reserve ratio:
0.20
 
 
a. How large is the money supply (M1)? 

b. Are the banks fully utilizing their lending capacity?

because banks currently have 

Now assume that the public deposited another $20 billion in cash in transactions accounts.

c. What would happen to the money supply initially (before any lending takes place)? 

Assuming the $20 billion in cash is not new money in the system, M1 will 

d. How much would the total lending capacity of the banking system be after this portfolio switch? 

e. How large would the money supply be if the banks fully utilized their lending capacity? 

f. What three steps could the Fed take to offset the potential growth in M1?

reserve requirements

the discount rate

bonds

 

Question 7

Suppose the Federal Reserve decided to purchase $40 billion worth of government securities in the open market.

a. By how much will M1 change initially if the entire $40 billion is deposited into transactions accounts?

M1 will initially by: b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent?

Total lending capacity will by: 

c. How will banks induce investors to utilize this expanded lending capacity?

As the money supply increases, interest rates will and investors will want to borrow funds.

 

Question 8

Refer to the News Wire to answer the following questions.

NEWS WIRE
RESERVE REQUIREMENTS
China Cuts Reserve Requirements

BEIJING—For the third time this year China’s central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world’s second-largest economy.

The People’s Bank of China’s half percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 15.5 percent. The move frees up about US $108 billion in additional funds that banks can now lend.

What was the money multiplier in China

Instructions:
Round your response to two decimal places.
a. before the change in reserve requirements? 

b. after the change in reserve requirements? 

 

Question 9

Refer to the News Wire to answer the following questions.

NEWS WIRE
RESERVE REQUIREMENTS
China Cuts Reserve Requirements

BEIJING—For the third time this year China’s central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world’s second-largest economy.

The People’s Bank of China’s half percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 15.5 percent. The move frees up about US $108 billion in additional funds that banks can now lend.

According to the News Wire,

Instructions:
Round your responses to one decimal place.
a. by how much did excess reserves in China increase? 

b. by how much did the lending capacity of Chinese banks increase as a result? 

 

Question 10

Refer to the News Wire to answer the following question.

NEWS WIRE
DISCOUNT RATES
Fed Cuts Key Interest Rate Eighth Time in Year

Washington, DC—Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. This is the eighth time this year the Fed had cut the discount rate, dropping it from 4.75 percent at the beginning of the year to a mere 0.50 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession.

If every one-point change in the federal funds rate alters aggregate demand by $200 billion, how far did AD shift in response to the interest rate cuts?

AD shifted to the by billion.