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ECON 1P92 Lecture Notes - Reserve Requirement, Excess Reserves, Demand Deposit

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cyangerbil831
8 Nov 2013
School
Brock University
Department
Economics
Course
ECON 1P92
Professor
Professor Cottrel

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ECON 1P92 Full Course Notes
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ECON 1P92 Full Course Notes
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Document Summary

Banks can invest in only one kind of asset loans. Only one kind od deposit demand deposit. Reserve ratio (v) of 20% = 20/100/ 0. 2. Ratio of reserves to deposits (r/d)= v= 0. 2. 1100: raises liabilities and assets (immediate reserves) by the same amount, bank"s reserve ratio initially increases to 27% Target reserves now (0. 2 x 1100) = 220. Bank now lends the excess of reserves of 480= (980-900) Bank returns to its 20% reserve ratio. in loans from the first bank. Second bank receiving: new deposits of (change in deposits, target reserves of = (0. 2 x 80=16, excess reserves of (expands its loans by) = (80-16=) A single new deposit begins sequence of deposits creation. Creates a total expansion of deposits equal to : (5x 100 = 500, dm x change in deposits = total change in deposits/ change in money supply. Banking system will change its deposits by 1/v times any change in reserves.

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Related Questions

Q2/PG.288 – Suppose a bank’s balance sheet looks as follows:
Assets Liabilities
Reserves $450 Deposits $5,000
and banks are required to hold reserves equal to 10% ofdeposits.
(a) How much excess reserve does the bank hold?
Answer: $4,500
(b) How much more can this bank lend?
Answer: $4,500
Q6/PG.288 – (a) When the reserve requirement changes, which of thefollowing will change for an individual bank (answer “change or “nochange”).
Transaction deposits - No Change
Total reserves - Change
Required reserves - Change
Excess reserves - Change
Lending capacity - Change
(b) When the reserve requirements changes, which of the followingwill change in the total banking system?
Transaction deposits - Change
Total reserves - No Change
Required reserves - No Change
Excess reserves - No Change
Lending capacity - Change
Q8/PG.288 – Suppose that a lottery winner deposits $20 million incash into her transactions account at the Bank of America. Assume areserve requirement of 25% and no excess reserves in the bankingsystem prior to this deposit.
(a) Use step 1 in the T-accounts below to show how her depositaffects the balance sheet
at B of A.
(b) Has the money supply been changed by her deposit? Answer:No
(c) Use step 2 below to show the changes at B of A after the bankfully uses its new lending
capacity.
(d) Has the money supply been changed in step 2? Answer: Yes
(e) In step 3 the new borrower(s) writes a check for the amount ofthe loan in step 2. That
check is deposited at another bank, and B of A pays the other bankwhen the check clears.
What does the B of A balance sheet look like now?
( f ) After the entire banking system uses the lending capacity ofthe initial ($20 million) deposit,
by how much will the following have changed?
Total reserves = 8,750,000
Total deposits = 20,000,000
Total loans = 15,000,000
Cash held by public = 20,000,000
The money supply = 35,000,000
Step 1: Winnings Deposited
Bank of America
_____________________________________________________________________________________
Assets Liabilities
(in millions) (in millions)
_____________________________________________________________________________________
Reserves = 20,000,000 Deposits = 20,000,000
Required = 5,000,000
Excess = 15,000,000
Subtotal = 20,000,000
Loans =
Total assets = 20,000,000 Total liabilities = 20,000,000

Step 2: Loans Made
Bank of America
Assets Liabilities
(in millions) (in millions)
Reserves = 20,000,000 Deposits = 20,000,000
Required = 8,750,000
Excess = 11,250,000
Subtotal = 40,000,000
Loans = 15,000,000
Total Assets = 35,000,000 Total Liabilities = 35,000,000


Step 3: Check Clears
Bank of America
Assets Liabilities
(in millions) (in millions)
Reserves = 20,000,000 Deposits = 20,000,000
Required = 5,000,000
Excess = 15,000,000
Subtotal = 20,000,000
Loans =
Total Assets = 20,000,000 Total Liabilities = 20,000,000

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.

QUESTION 31

The Board of Governors of the Federal Reserve System is

composed of seven members who are appointed by the President and approved by the Senate.

composed of 12 members of the Senate and the U.S. House of Representatives.

elected by the general public.

composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

it charges a higher interest rate to borrowers than does any other bank.

it functions as the government's bank only when commercial banks fail to do so.

it makes loans to individuals whom commercial banks do not believe are credit-worthy.

it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

providing checking account services for the government.

preparing the budget the President presents to Congress every year.

determining how to finance a deficit.

auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

1913.

1929.

1865.

1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

the Fed provides check clearing services.

the Fed aids in the sale of government securities.

the Fed supervises depository institutions.

the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

use and pay for the services of the Federal Reserve System.

set their interest rates according to schedules established by the Federal Reserve System.

keep a certain percentage of their deposits as reserves.

turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

50 district banks.

24 district banks.

12 district banks.

7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

the Board of Governors.

the Federal Advisory Committee.

the Federal Open Market Committee.

the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

systemic risk.

liquidity risk.

lending risk.

moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

fiat money banking.

required reserve banking.

fractional reserve banking.

central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

all customer deposits.

the minimum amount banks need to hold against time deposits.

federal reserve notes.

deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

a cash flow statement.

an income statement.

a balance sheet.

a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

The Federal Open Market Committee buys government securities.

There is a transfer of deposits from one bank to another bank.

There is change in the money multiplier.

The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

$80.

$0.

$400.

$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

appointing members to the Board of Governors of the Federal Reserve system.

issuing orders to buy or sell government securities for the Fed.

advising the Treasury Department on monetary policy.

printing money.