Macroeconomics Study Set 63

Business

Quiz 15 :

Money Creation

Quiz 15 :

Money Creation

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Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?
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Net worth is calculated as follows:
img .
When asset is up by $100,000 and net worth up by $20,000 then, liability must be up by $80,000 is calculated as shown below:
img

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Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced." Do you agree? Explain why or why not.
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No , I am not agreeing with this statement. Because when cash is deposited in a bank, it becomes to checkable deposits or other forms of money supply. Thus, the total money supply does not change, but the composition changes.

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How would a decrease in the reserve requirement affect the (a) size of the money multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?
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a. A decrease in the reserve requirement increases the size of the money multiplier in that the money multiplier is the inverse of the reserve ratio.
img b. A decrease in the reserve requirement increases the amount of excess reserves in the banking system.
img c. A decrease in the reserve requirement increases the extent to which the system could expand money supply because the extent to which the system could expand money supply positively relates to money multiplier. The money multiplier decreases; as a result the extent to which the system could expand money supply increases.

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Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio iS20 percent. The bank now sells $5000 in securities to the Federal Reserve Bank in its district, receiving a $5000 increase in reserves in return. What level of excess reserves does the bank now have? By what amount does your answer differ (yes, it does!) from the answer to question 3?
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What is the difference between an asset and a liability on a bank's balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank's balance sheet?
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Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. How might it temporarily remedy this situation through the Federal funds market? Now assume Mountain Star finds that its reserves will be substantially and permanently deficient. What remedy is available to this bank? (Hint: Recall your answer to question 6.)
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Why is the banking system in the United States referred to as a fractional reserve bank system? What is the role of deposit insurance in a fractional reserve system?
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Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?
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The balance sheet at the top of the next page is for Big Bucks Bank. The reserve ratio iS20 percent. img a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columnS1 and 1? how the bank's balance sheet will appear after the bank has lent this additional amount. b. By how much has the supply of money changed? c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columnS2 and 2?. d. Answer questions a, b, and c on the assumption that the reserve ratio iS15 percent.
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LAST WORD Explain how the bank panics of 1930 to 1933 produced a decline in the nation's money supply. Why are such panics highly unlikely today?
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Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?
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Suppose that Serendipity Bank has excess reserves of $8000 and checkable deposits of $150,000. If the reserve ratio iS20 percent, what is the size of the bank's actual reserves?
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Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio iS25 percent. img a. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? Show in columnS1 and 1? how the consolidated balance sheet would look after this amount has been lent. What is the size of the monetary multiplier? b. Answer the questions in part a assuming the reserve ratio iS20 percent. What is the resulting difference in the amount that the commercial banking system can lend?
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The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio iS20 percent. Households deposit $5000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?
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If the required reserve ratio iS10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?
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Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?
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When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed." Explain.
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