ECON102 Lecture Notes - Lecture 8: Reserve Requirement, Excess Reserves, Monetary Base

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blushworm378

2 Oct 2018

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University of Waterloo

Department

Economics

Course

ECON102

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Maryann Vaughan

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ECON102 Lecture 7: ECON 102 Lecture 7 -Money, The Price Level, and Inflation

ECON102 Lecture Notes - Lecture 8: Reserve Requirement, Excess Reserves, Monetary Base

ECON102 Lecture Notes - Lecture 11: Foreign Exchange Market, The Foreign Exchange, Money Market

Document Summary

Econ 102 lecture 8 money, the price level. That portion of savings and chequing deposits that banks are required by government regulation to set aside in order to meet the demand for withdrawals. Remaining funds are loaned out, or invested. Desired reserve ratio the ratio of the bank"s reserves to total deposits that a bank plans to hold. Currency drain an increase in currency held outside the banks. A currency drain decreases the amount of money that banks can create from a given increase in the monetary base because currency drains from their reserves and decreases the excess reserves available. The notes and coins on hand and deposits at the bank of canada. The number of reserves the bank plans to hold. The minimum amount of reserves that banks must hold against deposits. Figure 8. 3 illustrates one round in how the banking system creates money by making loans. Financial institutions have more money than they require.

Related Questions

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement	Simple Money Multiplier	Money Supply
(Percent)	Simple Money Multiplier	(Dollars)
20
10

A higher reserve requirement is associated with a money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.

byzantiumarmadillo380

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

crimsonbadger400

6. Other things beingâ equal, the M1 money supply varies in the same direction as the magnitude of

A.âk, theâ currency/DDO ratio

B.rrâ , the average required reserve ratio

C.âre, theâ banksâ desired excess reserves ratio

D.none of the above

7. Suppose that discounts and advancesâ (Fed loans of reserves toâ banks) increaseâ $200 million, Treasury deposits at the Fed increaseâ $500 million, and the Fed buysâ $700 million of Treasury bills from dealers. The net effect of these 3 transactions is to

A.increase bank reserves byâ $1,000 million

B.increase bank reserves byâ $1,400 million

C.increase bank reserves byâ $400 billion

D.leave bank reserves unchanged

8. Other things being equalâ (assuming the Fed takes noâ action), a sharp increase in interest rates caused by market forces in a strong economic recovery is likely to

A.increaseâ k, the currencyâ ratio, thus reducing the money supply

B.reduce the monetaryâ base, thus increasing the money supply

C.reduce reâ , the desired excess reserveâ ratio, thus increasing the money supply

D.do none of the above

9. The Federal Reserve is able to control most accurately in the short run

A.âB, the monetary base

B.âk, the currency ratio

C.reâ , theâ bankâs desired excess reserve ratio

D.M1, the U.S. money supply

10. The Federal Reserve implementedâ âoperation twistâ inâ 2011-2012 by

A.simultaneously buyingâ long-term and sellingâ short-term Treasury securities

B.heavy purchases of bothâ long-term andâ short-term Treasury securities

C.lowering the federal funds rate target and buyingâ long-term bonds

D.purchasingâ short-term securities and buyingâ mortgage-backed bonds

11. Duringâ 2008-2014, Fed Chairman Ben Bernanke drew a lot of criticism for

A.maintainingâ short-term interest rates at extremely low levels for an extended period

B.bailing out large banks that would otherwise have failed

C.conducting the quantitative easing policy for about six years

D.all of the above

ECON102 Lecture Notes - Lecture 8: Reserve Requirement, Excess Reserves, Monetary Base

ECON102 Lecture 7: ECON 102 Lecture 7 -Money, The Price Level, and Inflation

ECON102 Lecture Notes - Lecture 8: Reserve Requirement, Excess Reserves, Monetary Base

ECON102 Lecture Notes - Lecture 11: Foreign Exchange Market, The Foreign Exchange, Money Market

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