ECON 214 Problem Set 10 solutions complete answers

ECON 214 Problem Set 10 solutions complete answers 

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The balance sheet below reflects Zee Bank after its purchase of $50 million in government securities from the Fed. Assume a required reserve ratio of 10%, that banks hold no excess reserves, and all currency is deposited into the banking system.

 

Suppose you have $10,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for future use. If the required reserve ratio is 10%, then what will be the maximum impact on money supply today as a result of your action?

 

Assume the Fed is trying to decide whether to lower the required reserve ratio to 8%. Currently, the required reserve ratio is 10%. If banks keep no excess reserves, how much more would the money supply increase if the Fed lowers the reserve ratio when someone deposits $500 into a checking account? 

 

Suppose a bank has $700 million in deposits and $30 million in required reserves, and it is holding no excess reserves. What is the required reserve ratio? Give your answer to two decimals.

 

Let’s suppose that a bank has $800 million in total deposits. This bank is subject to a 20% required reserve ratio and has $150 million in reserves. Which of the following statements is correct?

 

What will change on the balance sheet if the Fed buys $1000 in government securities from the bank?

 

What will change on the balance sheet if the Fed sells $1700 in government securities to the bank?

 

What will change on the bank's balance sheet if Francisco deposits $800 into his checking account?

 

Suppose that you take $350 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 9%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action?

 

Include the $350 as part of the new money supply and assume the bank does not hold excess reserves. Give your answer to two decimals.

 

Question 1

 

Suppose that you take $50 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 9%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action?

 

Include the $50 as part of the new money supply and assume the bank does not hold excess reserves. Give your answer to two decimals.

 

Question 2

 

Consider the following balance sheet for the Wahoo Bank. Use it to answer the two questions that follow. Use a required reserve ratio of 10% and assume that the bank keeps no excess reserves.

 

Part 1

 

What will change on the balance sheet if Junita withdraws $200 from her checking account?

 

Part 2

 

What will change on the bank's balance sheet if Francisco deposits $500 into his checking account?

 

Question 3

 

Consider the balance sheet for the Wahoo Bank presented below. Use it to answer the two questions that follow. Use a required reserve ratio of 10% and assume that the bank keeps no excess reserves.

 

Part 1

 

What will change on the balance sheet if the Fed buys $1200 in government securities from the bank?

 

Part 2

 

What will change on the balance sheet if the Fed sells $500 in government securities to the bank?

 

Question 4

 

Please read the article below, and use the information in the article to answer the following question.

 

The Birth of U.S. Fiat Currency by Franklin Noll

 

Part 1

 

Which of the following tools can the Fed use to contract the money supply? To expand the money supply?

 

Part 2

 

Which one of the Fed actions in Part 1 might be more difficult if U.S. currency still consisted of demand notes rather than fiat money?

 

Question 5

 

Let’s suppose that a bank has $600 million in total deposits. This bank is subject to a 20% required reserve ratio and has $100 million in reserves. Which of the following statements is correct?

 

Question 6

 

In the money creation process, the simple money multiplier assumes that banks hold no excess reserves. What is the consequence of a bank holding excess reserves?

 

Question 7

 

Suppose a bank has $600 million in deposits and $30 million in required reserves, and it is holding no excess reserves. What is the required reserve ratio? Give your answer to two decimals.

 

Question 8

 

Use the balance sheet for the Bank of the Economists (where all economists go to bank) to answer the questions below. Assume the required reserve ratio is 20%.

 

A. What are the Bank of the Economists' required reserves?

 

B. What are its current excess reserves? (Enter zero if it has no excess reserves.)

 

C. What is the maximum amount in additional loans that can the bank can make? (Enter zero if it cannot make any additional loans at this time.) 

 

Question 9

 

For a variety of reasons, a bank sometimes will hold more reserves than is legally required. These reserves are known as excess reserves. How does holding excess reserves affect the degree to which the money supply will change?

 

Question 10

 

To increase the money supply, what could the Federal Reserve do?

 

Question 11

 

Part 1

 

Use the information in the table below to answer the following two questions.

 

Part 2

 

Now, calculate the amount of currency in billions of dollars in the economy from the given information (assume no traveler's checks).

 

Question 12

 

Assume the Fed is trying to decide whether to lower the required reserve ratio to 8%. Currently, the required reserve ratio is 10%. If banks keep no excess reserves, how much more would the money supply increase if the Fed lowers the reserve ratio when someone deposits $200 into a checking account? 

 

Question 13

 

Suppose you have $12,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for future use. If the required reserve ratio is 10%, then what will be the maximum impact on money supply today as a result of your action?

 

Question 14

 

If the Fed increases the discount rate, which of the following accurately describes the sequence of events that will follow in the banking system, finally leading to a decline in money supply?

 

Question 15

 

The balance sheet below reflects Zee Bank after its purchase of $30 million in government securities from the Fed. Assume a required reserve ratio of 10%, that banks hold no excess reserves, and all currency is deposited into the banking system.

 

How did the purchase of $30 million in government securities from the Fed affect the money supply?