Unit 5 Review FRQs - Long-run Consequences of Stabilization Policies

 

FRQ # 1

 

Janet Smith deposits $1,000 of her cash holdings in her checking account at First Federal Bank. The reserve requirement is 20 percent and the bank has no excess reserves.

1. What is the immediate effect of her deposit on the money supply? Explain why.
   
   
2. What is the maximum amount of money First Federal can initially loan out? Explain how you determined this amount.
   
   
3. What is the maximum amount of money the entire banking system can create? Explain how you determined this amount.
   
   
4. Give one reason why the money supply may not increase by the amount you identified in (c).

1. Calculate the required reserve ratio. (Show your work)

2. Assume that Pam wants to borrow money to pay for a new car from Sharpeland Bank.

A. What is the maximum amount that Sharpeland Bank can loan out if it wants to keep all of its bonds?

B. What is the maximum amount that the banking system can create given the balance sheet above?

3. Assume instead that Michael withdraws $10,000 in cash from his checking account at Sharpeland.

A. By how much will Sharpeland Bank's reserves change based on Michael's withdrawal? (Be specific.)

B. What is the immediate effect of the withdrawal on the M1 measure of the money supply? Explain.

C. As a result of the withdrawal, what is the new value of excess reserves for Sharpeland Bank based on the reserve requirement from part (a)?

2. Suppose Bob digs up a box in his front yard that contains $1000.

A) Would anything happen to the money supply (M1)? Explain

B) What would happen to the money supply when Bob deposits this in a bank (reserve-deposit ratio is .05)? What is the maximum amount of money that can be created? How does this occur?

First Bank has total deposits of $2,000,000 and legal reserves of $220,000. a. If the reserve requirement is 10 percent, what is the maximum loan that First Bank can make, and what is the maximum increase in the money supply based on First Bank's reserve position? b. If the reserve requirement is changed to 5 percent, how much can First Bank lend, and by how much can the money supply be expanded?