1.
Assets
Liabilities
Reserves $2,000
Deposits $10,000
Loans 8,000
Refer to Table.
Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.
$400.
$680.
$750.
2.
Bank of Springfield
Assets
Liabilities
Reserves
$19,200
Deposits
$240,000
Loans
228,000
1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?
5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent
2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
store of value
medium of exchange
unit of account
None of the above is correct.
3. Under a fractional-reserve banking system, banks
hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.
4. Over one-time horizon or another, Fed policy decisions influence
inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.
5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000
its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.
1.
|
Assets |
Liabilities |
|
Reserves $2,000 |
Deposits $10,000 |
|
Loans 8,000 |
Refer to Table.
Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.
$400.
$680.
$750.
8.00 per cent 8.42 per cent 95.00 per cent |
|||||||||||||
medium of exchange unit of account None of the above is correct. |
generally lend out a majority of the funds deposited. cause the money supply to fall by lending out reserves. All of the above are correct. |
inflation but not employment. employment but not inflation. neither inflation nor employment. |
| 5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000 |
its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.
Related textbook solutions
Related questions
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. The Federal Reserve buys a government bond worth $250,000 from Raphael, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.
Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).
| Assets | Liabilities | ||
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.
Hint: If the change is negative, be sure to enter the value as negative number.
| Amount Deposited | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
| (Dollars) | (Dollars) | (Dollars) |
| 250,000 |
Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately uses the funds to write a check to Larry. Larry deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Becky as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
| Increase in Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| Third Fidelity Bank |
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $250,000 injection into the money supply results in an overall increase of in demand deposits.
The money supply expansion process
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $750,000 from Raphael, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.
Complete the following to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans).
a) The Assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000). On the Liabilities side, First Main Street Bank's balance sheet, (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000).
b) Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as a negative number.
| Amount Deposited | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
| (Dollars) | (Dollars) | (Dollars) |
| 750,000 |
c) Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately writes a check for the full amount to Larry. Larry then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Becky.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
| Increase in Checkable Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| Third Fidelity Bank |
d) Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of ($370,000/$3,000,000/$3,750,000) in checkable deposits.
QUESTION 1
Refer to this scenario for all of the questions on this problem set.
|
BALANCE SHEET OF A MONOPOLY BANK |
|
|
ASSETS |
LIABILITIES AND CAPITAL |
|
Reserves: 500 Loans and Securities: 4,500 Other Assets: 1,000 Total Assets 6,000 |
Checkable Deposits: 5,000 Capital: 1,000 Total Liabilities & Capital 6,000 |
The balance sheet of the only bank in a simple economy is shown below. The reserve requirement is 10%. If cash in the hands of the non-bank public is $3,000, the Money Supply = ___________________.
QUESTION 2
|
BALANCE SHEET OF A MONOPOLY BANK |
|
|
ASSETS |
LIABILITIES AND CAPITAL |
|
Reserves: 500 Loans and Securities: 4,500 Other Assets: 1,000 Total Assets 6,000 |
Checkable Deposits: 5,000 Capital: 1,000 Total Liabilities & Capital 6,000 |
Suppose people deposit $1,000 of their cash into checking accounts. In the balance sheet below, enter the new totals in all of the accounts, immediately following the transaction, before the bank does any new lending.
|
ASSETS |
LIABILITIES AND CAPITAL |
|
Reserves: Loans and Securities: Other Assets: 1,000 Total Assets: |
Checkable Deposits
Capital Total Liabilities and Capital: |
QUESTION 3
Recall that cash in the hands of the non-bank public was initially equal to $3,000. Thus, immediately following the $1,000 deposit, currency in the hands of the non-bank public = _____________
QUESTION 4
And Deposits = ______________
