ECON102 Lecture Notes - Lecture 26: Overnight Rate, Aggregate Demand, Reserve Requirement

46 views4 pages

cerisegiraffe538

17 Apr 2018

School

University of Alberta

Department

Economics

Course

ECON102

Professor

Andrew Wong

For unlimited access to Class Notes, a Class+ subscription is required.

wunch and 39345 others unlocked

ECON102 Full Course Notes

Verified Note

25 documents

Document Summary

Econ 102 lecture 26 banks and crea9ng money. A simple way to account for a bank"s transac2ons. Records changes in banks assets and liabili9es. The process above increases the money supply by (from chapter 14. pptx , slide 8) Money is created with repeated cycles of lending and deposi2ng of funds. Essen2ally when a bank receives a deposit they can use that to credit the account of someone who wants a loan, thus crea2ng money and making them pay the bank back. This has in a2onary e ects, as the bank has not given you any physical money, but has increased the money supply regardless. I honestly do not have a good grasp of this concept myself, so it"s very hard to explain. The money mul9plier is the ra2o of money created by the lending ac2vi2es of the banking system to the money created by the central bank.

Related Questions

1. Which of the following is NOT a tool the Fed uses to manage the money supply?

A) open market operations

B) discount policy

C) deposit insurance

D) reserve requirements 0.4 points

2. The problem with barter economies is:

A) less time and trouble to trade as compared with a money economy.

B) that there may be a double coincidence of wants.

C) a banking system for trade to occur.

D) that there be a single coincidence of wants.

3. If banks do not loan out all their excess reserves, then the real world multiplier is

A) smaller than 1/RR.

B) larger than 1/RR.

C) equal to 1/RR.

D) not related to 1/RR.

4. If the Federal Open Market Committee wants to increase the money supply through open market operations, it will

A) buy U.S. Treasury Securities.

B) sell U.S. Treasury Securities.

C) increase the discount rate.

D) decrease the discount rate.

5. M1 includes

A) currency in circulation, checking account balances at banks, the value of traveler's checks.

B) currency in circulation, savings accounts, checking account balances at banks.

C) currency in circulation, savings accounts, checking account balances at banks, travelers.

D) coins, savings account balances at banks, traveler's checks.

6. Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

A) 19 percent.

B) 15 percent.

C) 11 percent.

D) 6 percent.

7. According to the quantity theory of money, the inflation rate equals

A) the money supply minus real output.

B) real output minus the money supply.

C) the growth rate of the money supply minus the growth rate of real output.

D) the growth rate of real output minus the growth rate of the money supply.

8. Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in the book/lecture slide. Correct answers contain no decimals. Please report them as they are.

a) What is the total change in checking account deposits?

b) How much new money is created? (or what is the change in money supply given the above state conditions?) The total change in the money supply is Blank 2.

c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Bank 3 than in the real world.

orangegnu991

1.Consider an economy in which initially there are no banks. Suppose that one consumer initially holds the entire money supply in the form of $1,000 in currency. Then assume a new bank is opened, The First National Bank, and the consumer deposits the entire $1,000 into the bank. Based on this scenario answer the following questions:

a Assuming that the First National Bank has a 100% reserve ratio, use a T account to show what effect this deposit will have.

b Still assuming a 100% reserve ratio, explain what effect this deposit will have on the economyâs total money supply.

c Show how the First National Banks T account will look, if instead it has a 10% reserve ratio and holds no excess reserves. (0.5 mark)

d Following form c. if other banks now open up and face a 10% reserve ratio, and assuming that every consumer holds her or his money as deposits instead of currency, explain what effect the initial deposit will eventually have on the money supply.

e Are consumers as a group wealthier when the banking system chooses a 10% reserve ratio. Explain the reasons for your answer.

The isolated nation of Islandia currently does not trade with other countries. The banking system of Islandia consists of four commercial banks' these banks deal with consumers and businesses and one central bank that deals exclusively with the commercial banks. The central bank has set a reserve requirement of 10 percent. The banks are creatively named First Bank, Second Bank, Third Bank, and Fourth Bank. All of the commercial banks, except First Bank, have used all of their excess reserves to issue loans to consumers and businesses. First Bank is holding $288,000 in excess reserves.

Suppose First Bank loans all of its excess reserves to a customer to buy a custom-built house. The home builder deposits all of the money received for building the house into Second Bank, which then lends all its excess reserves to a customer to buy machines for her factory. The machine manufacturer deposits all of the money received into Third Bank, which lends all its excess reserves to a clothing maker to buy textiles. The textile manufacturer deposits all of the money received into Fourth Bank, which lends all its excess reserves to a rancher to buy more cattle. By how much have these rounds of lending increased the money supply in Islandia?

Instructions: Round your answer to 2 decimal places.

taupecoyote41

ECON102 Lecture Notes - Lecture 26: Overnight Rate, Aggregate Demand, Reserve Requirement

ECON102 Full Course Notes

Document Summary

Get access

Related Documents

ECON102 Lecture Notes - Lecture 25: American Institute For Economic Research, Excess Reserves, Money Supply

ECON102 Lecture Notes - Lecture 11: Stephen Poloz, Fiat Money, Credit Union

ECON102 Lecture Notes - Lecture 17: Output Gap, Overnight Rate, Money Multiplier

Related Questions