ECO 1102 Lecture Notes - Lecture 11: Excess Reserves, Capital Requirement, Taco

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Fractional-reserve banking: a banking system in which banks hold only a fraction of deposits as reserves reserve ratio: the fraction of deposits that banks hold as reserves. Money multiplier=amount bank generates each dollar it receives = 1/r (r = reserves) Bank capital: the resources the bank owners put into an institution from issuing equity (e. g. , stock) . To increase the money supply, the boc buys bonds (or/and treasury bills) from the public. While cleaning your apartment, you look under the sofa cushion and find a bill (and a half-eaten taco). You deposit the (cid:271)ill i(cid:374) you(cid:396) (cid:272)he(cid:395)ui(cid:374)g a(cid:272)(cid:272)ou(cid:374)t. the (cid:271)a(cid:374)k"s (cid:396)ese(cid:396)ve (cid:396)e(cid:395)ui(cid:396)e(cid:373)e(cid:374)t is 20 pe(cid:396)(cid:272)e(cid:374)t of deposits. If banks hold no excess reserves, then money multiplier = 1/r = 1/0. 2 = 5 the maximum possible increase in deposits is 5 x = but money supply also includes currency, which falls by. Hence, max increase in money supply = .

Related Questions

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

cyanworm559

1. (0.2 pt) In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. (0.2 pt) If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. (0.2 pt) Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply (decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4.(0.2 pt) If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much? (Make sure to show all your work.)

chocolateswan996

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.

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ECO 1102 Lecture Notes - Lecture 11: Excess Reserves, Capital Requirement, Taco

ECO 1102 Full Course Notes

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