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ECON-1010 Chapter Notes - Chapter 8: Federal Reserve System, Reserve Requirement, Financial Technology

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brownmule668
4 Feb 2020
School
Vanderbilt University
Department
Economics
Course
ECON-1010
Professor
Buckles Stephen

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ECON-1010 Full Course Notes
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Document Summary

Money--anything that is commonly used to buy and sell goods and services: unit of account--a means of measuring cost or value (money is a "yardstick", medium of exchange--anything commonly accepted as a method of payment. Store of value--you can save it and use it at a later time. Influence how much money is created by the banking system (chapter 12 will go into more depth) Foregone interest (as interest increases, it is more costly to hold money) Interest rates: highest rates are normally those that are riskiest for the lender, the longest term, or the least collateral, **inverse relationship between bond prices and interest rates--as interest rates rise, the prices of existing bonds fall.

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Related Questions

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.

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.

Suppose that First National Bank, Second National Bank, and Third National Bank have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $1.5 million from John, a client of First National Bank. He deposits the money into his checking account at First National Bank.

Tasks:

Suppose that First National Bank loans out all its new excess reserves to Nancy, who immediately uses the funds to write a check for Mark. Mark deposits the funds immediately into his checking account at Second National Bank. Then, Second National Bank lends out all its new excess reserves to Kyle, who writes a check for Amy, who deposits the money into her account at Third National Bank. Third National Bank lends out all its new excess reserves as well.

Fill in the following table to show the effect of this ongoing chain of events at each of the banks. Enter each answer to the nearest penny.