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ECON 1020 Lecture Notes - Lecture 73: Reserve Requirement, Excess Reserves

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School
University of Manitoba
Department
Economics
Course
ECON 1020
Professor
Ryan A.Compton

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ECON 1020 Full Course Notes
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ECON 1020 Full Course Notes
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Lomoar cpsd| 987298 low o desired reserve ratio. Desired reserve ratio = chartered bank"s desired reserves chartered bank"s demand-deposit liabilities. Lower the ratio = the more money you have to lend out. This is the portion you are going to lend out. Excess reserves = actual reserves (cash) desired reserves. Excess reserves = 110,000 (100,000 x 20%) = 90,000. Transaction #4: clearing a cheque - ,000 cheque reduces reserves and demand deposits. Cash reserves (asset) = ,000 (,000 - ,000 = ,000: property (asset) = ,000, demand deposits (liability) = Assume we are starting with transaction #3 (still have cash ,000) Transaction 5a: granting a loan - ,000 loan equal to excess reserves made and then deposited to chequing reserves: cash (asset) = ,000: property (asset) = ,000, demand deposits (liability) = ,000: ** still same amount of assets, just redistributing ,000 of cash into a loan. Transaction 5b: using the loan - ,000 loan cashed: cash reserves (asset) =

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Related Questions

All of the following are part of the narrowest definition of moneysupply, M1, except:
A) Bill has $50 worth of pennies in a coffee jar
B) Mike has $600 in his checking account
C) Jill has $400 in traveler’s checks
D) Jules has $400 worth of $1 bills in the piggybank
E) John has $500 in his savings account
2. Which of the following make up the money supply as it is mostnarrowly defined?
A) coins and currency held by the nonbank public, traveler'schecks, and savings deposits
B) all coins and currency held by the nonbank public
C) coins and currency held by the nonbank public, checkingdeposits, and traveler's checks
D) coins and currency held by the nonbank public, checkingdeposits, and savings deposits
E) checking deposits, savings deposits, and money market mutualfund accounts
3. Which of the following are included in the narrowest definitionof the money supply?
A) cash in bank vaults
B) savings deposits
C) money market mutual fund accounts
D) negotiable certificates of deposit
E) checkable deposits
4. If you returned a $5 Federal Reserve note to the Fed, you couldreceive
A) $5 in silver
B) $5 in gold
C) 5 one-dollar bills
D) 10 one-dollar bills
E) a small gold bar
5. The Federal Reserve's narrowest definition of money is
A) M3
B) M2
C) M1
D) near money
E) money market mutual funds
6. As a lender, a bank holds an advantage over any individualperson because
A) individuals do not diversify their asset holdings
B) individuals are better at enforcing loan contracts
C) banks have to engage in extensive and costly searches forpotential borrowers
D) banks develop expertise in evaluating borrowers' loanapplications
E) individuals have extensive knowledge of and experience inwriting loan contracts
7. If a bank has $1 million in assets and $50,000 in net worth, itsliabilities must equal
A) $50,000
B) $1,050,000
C) $50 million
D) $1,000,000
E) $950,000
8. Suppose the required reserve ratio is 0.1 and Linda deposits$4,000 in cash at the College State Bank. If the bank held noexcess reserves before Linda's deposit and now increases itsreserves by $500, which of the following is true?
A) The bank must have lent out an additional $4,000.
B) The $500 are required reserves.
C) The bank has excess reserves of $100.
D) Both the bank's assets and its liabilities rise by $500.
E) The bank has $500 in excess reserves.
9. Suppose that the First National Bank acquires $500,000 in newdeposits and the required reserve ratio is 12 percent. Which of thefollowing is true?
A) The First National Bank can increase the money supply by$500,000.
B) The First National Bank can increase the money supply by$400,000.
C) The First National Bank can increase the money supply by$440,000.
D) The entire banking system can increase the money supply by nomore than $500,000 if the First National Bank lends out its excessreserves.
E) The entire banking system can increase the money supply by nomore than $440,000 if the First National Bank lends out its excessreserves.
10. The ability to convert a store of value into a medium ofexchange with little loss of value is known as
A) arbitrage
B) solvency
C) liquidity
D) liability
E) currency
11. Which of the following would likely increase the moneysupply?
A) One bank buys government securities from another bank.
B) The required reserve ratio increases.
C) The Fed increases the reserves of commercial banks and the bankshold these as excess reserves.
D) The discount rate increases.
E) A bank sells government securities to the Fed.
12. The simple money multiplier equals
A) the required reserve ratio
B) the reciprocal of the required reserve ratio
C) 1 minus the required reserve ratio
D) 1 minus the reciprocal of the required reserve ratio
E) the square of the required reserve ratio
13. If the simple money multiplier is 5, the required reserve ratiomust be
A) 5 percent
B) 0
C) 10 percent
D) 50 percent
E) 20 percent
14. If an increase in excess reserves of $10 million increasescheckable deposits in the banking system by a maximum of $200million, the required reserve ratio is
A) 0
B) 5 percent
C) 10 percent
D) 20 percent
E) 2 percent
15. Suppose the reserve requirement ratio is 20 percent. Assumingno bank holds excess reserves and nobody withdraws cash, a $10,000injection of new excess reserves by the Fed can create
A) $2,000 in new checkable deposits
B) $10,000 in new checkable deposits
C) $50,000 in new checkable deposits
D) $500,000 in new checkable deposits
E) $50,000 in cash
16. Which of the following is not one of the procedures the Feduses to change the money supply?
A) buying government securities
B) selling government securities
C) lending reserves through the discount window
D) changing the required reserve ratio
E) extending loans to the public
17. Which of the following statements is correct?
A) To control the money supply, the Fed relies primarily on thereserve requirement.
B) The discount rate is the rate of interest banks charge to theirbest customers.
C) The Fed changes the reserve requirement frequently.
D) Because the Fed has no way to earn income, it is dependent uponCongress for appropriations.
E) Banks can turn a borrower's IOU into money--i.e., they cancreate money.
18. Lowering the discount rate is a way to expand the money supplybecause
A) it encourages banks to borrow from the Fed so they can moreeasily accommodate their customers' needs for loans
B) it encourages business customers to borrow directly from theFed
C) a lower discount rate reduces the amount of reserves banks arerequired to keep
D) a lower discount rate automatically reduces excessreserves
E) it encourages banks to sell U.S. government securities andincrease their cash reserves
19. The Fed operates
A) on a balanced budget
B) at a loss, since Federal Reserve notes and member bank depositsearn no interest
C) at a profit, since Federal Reserve notes and bank deposits earnno interest, but government securities and loans to commercialbanks do
D) at a profit, since Federal Reserve notes and member bankdeposits earn interest
E) at a loss, since Federal Reserve notes and member bank depositsearn interest, but government securities and loans to commercialbanks do not
20. Katie Sierra is willing to pay a higher interest rate. With noincome verification, she can apply for a type of loan commonlycalled
A) lion loans
B) liars loans
C) phantom loans
D) vaporware loans
E) prime-rate loans





1. which of the following would be counted as gross domestic

investment?


  • GM issues 1 million shares of stock



  • consolidated construction purchases 1,000 acres of land for a


regional shopping center it plans to build in a few years.


  • a walmart store adds 1,000 T-shirts to ti's


inverotry


  • A college buys computers for it's office staff



  • you and your significant other buy a house



  • you put money into a saving accountÂ









2. a car company currently has a capital stock of $100 million

and desires a capital stock of $110 million


a. if it experiences no depreciation how mch will it need to

invest to get to its desired level of capital stock

b. if its annual depreciation is 5% how much will it need to

invest to get to its desired level

c. if its annual depreciation is 10% how much will it need to

invest to get to its desired level









3. use the information below to compute the levels of gross and

net private domestic investment data are in billions of dollars

a. change in business inventories $59.3

b. residental cinstruction 369.6

c. producers durable equipment 691.3

d. nonresidential structures 246.9

e. depreciation 713.9



4. complete the table which shows investment in the united

states in billions of 2000 chained dollars


year 2005 gross domestic investment 1,873.5 depreciation 1,266.6 net private domestic investment ?

year 2006 gross domestic investnment ? depreciation 1,2161 net priavte domestic investment 696.4

year 2007 gross domestic investment 1,809.7 depreciation ? net priavate domestic investment 546.7










5. which of the following is part of M1 and M2

a. $0.27 that has accumulated under a couch cushion

b. your $2,000 line of credit with your visa account

c. $210 balance in your checking account

d. $417 in your savings account

e. 10 shares of the recently issued facebook stock that your

grandma gave you

f. $200 in travelers checks you purchased before your summer

trip to italy









6. suppose a banks balance sheet looks as follows:



assets


reservers

$2,700




property

$ 4,500


liabilities

deposits $7,200


and banks the reserve requirement is 20 percent

a. how much is excess reserves ratio 20 percent

b. how much can this bank lend






7. suppose a bank A with 25% reserve requirement has $50 million

in reserves and $200 million in checkable deposits one of the banks

depositors a major corporation writes a check to another

corporation for $5 million the check is deposited in another bank

(bank B)

a. explain how the withdrawl affects the banks reserves and

checkable deposits

b. by how much must bank A have to reduce lending?






8. assume the bank of america has access reserves of $30

milllion and outstanding transaction (checking) deposits of $180

million if the reserve ratio is 10% what is the size of the bank of

america total reserves?






9 banks fail when all depositors try to withdraw money at the

same time one way to prevent this problem would be to require bank

to hold 0 of deposits on hand

a. why would this not be desirable thing to do

b. what would happen to the banking system

c. explain how the law which requires banks to purchase fdic

insurance makes 100% reserve system unnecessary.