ECO 1102 Lecture Notes - Lecture 14: Money Multiplier, Excess Reserves, Money Supply

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10 Dec 2016

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ECO 1102 Full Course Notes

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Chapter 10: part 2 the monetary system. Using a t-account to show changes in the bank"s assets and liabilities. Economy with no banks; currency is the only form of money; initial supply of money is . Suppose someone opens a bank: first national bank. All deposits are held as reserves: 100 percent-reserve banking. Reserves: deposits that banks have received but have not loaned out. Fractional-reserve banking: a banking system in which banks hold only a fraction of deposits as reserves. Reserve ratio: the fraction of deposits that banks hold as reserves. ***the money supply (currency + deposits) = . Reserves are assets, and deposits are liabilities. ***the money supply = + + 81$ = . ***the money supply = + + + $ 72. 90 = . 90. First national lending = . 00 (= 0. 9 x ) Third national lending = . 90 (=0. 9 x ) Total money supply = . 00 (total money supply = 100 x 1/r.

Related Questions

6. The purpose of this exercise is to illustrate the multiple expansion of bank deposits in a fractional- reserve banking system. Assume the Fedâs legal reserve requirement is 10%

(Formula)

1. a. Required reserves = Required reserve ratio Â´ checkable deposits

b. Actual reserves = Required reserves + excess reserves

The consolidated balance sheet of the U.S. banking system indicates:

Assets Liabilities

Reserves $40,000 Checkable deposits $100,000

a. The simple money multiplier equals _______________. Formula:

b. The banking system has excess reserves of $_______________.

Formula (write out formula #1a):

Formula (write out formula #1b):

c. Loans and the money supply can be expanded by a maximum of $_______________.

mauvefox989

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.

crimsonbadger400

The economy of elmendyn contains 900 $1 bills:

If people hold all money as currency, the quantity of money is $__________.

If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is $__________.

If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is $__________.

If people hold all money as demand deposits and banks maintain a reserve ratio of 12.5 percent, the quantity of money is $__________.

If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 12.5 percent, the quantity of money is $__________.

harlequinlouse966

ECO 1102 Lecture Notes - Lecture 14: Money Multiplier, Excess Reserves, Money Supply

ECO 1102 Full Course Notes

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