BEO2000 Study Guide - Final Guide: Money Multiplier, Reserve Requirement, Excess Reserves

105 views2 pages

periwinklerabbit131

28 May 2020

School

Victoria University

Department

BEO

Course

BEO2000

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Question 1: explain why the simple" money multiplier overstates the money creation value compared to the true" money multiplier. The simple model ignores the role banks and their customers play in the creation process. The bank s customers can decide to hold currency and the bank can decide to hold excess reserves. Both of these will restrict the banking system s ability to create deposits. Thus, the true multiplier is less than the prediction of the simple deposit multiplier. An increase in the currency-deposit ratio means that people hold more currency and banks have fewer funds to create deposits. An increase in the reserve-deposit ratio means that banks now hold more reserves and thus fewer deposits can be created. Banks are forced to hold their reserves either as vault cash or as deposits at the rba of which the former earns no interest while the latter earns very little.

Related Questions

Simple deposit multiplier

Suppose that Marissa finds $5,000 in cash in a mattress that was given to her and decides to deposit all of the money into her cousin's checking account. If the assumptions of the simple deposit multiplier hold and the required reserve ratio is set at 10%, the banking system will increase/decrease the money supply by ____________. (Note: Currency held by the public is counted in the money supply as part of M1.)

Which of the following assumptions is necessary for a change in checkable deposits to be exactly determined by the simple deposit multiplier?

No borrowers hold money as currency but instead deposit all money in checking accounts.

Borrower default rates are stable.

People's marginal propensity to consume does not rise with income.

If the previous assumption did not hold, the change in the money supply would be ________ than the amount you indicated, because:

If borrower default rates were not stable, then the money supply expansion process would be disrupted

If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system

If people kept some of their new money in the form of currency rather than depositing it in their checking accounts, this money could not be lent out by banks

cyanjellyfish808

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement	Simple Money Multiplier	Money Supply
(Percent)	Simple Money Multiplier	(Dollars)
20
10

A higher reserve requirement is associated with a money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.

byzantiumarmadillo380

In a country the monetary base is 1000. People hold one-fourth of their money in the form of currency (and thus three-fourths as bank deposits). Banks hold a third of their deposits in reserve.

a) What is reserve-deposit ratio, currency-deposit ratio, the money multiplier, and the money supply?

b) One day, Government passed a new rule that people needs to pay tax on their currency holdings, and people now want to hold one-fifth their money in the form of currency (and thus four-fifths as bank deposits). If the central bank does nothing, what is the money supply?

c) The central bank wants to conduct an open market operation to keep the money supply at its original level, does it buy or sell government bonds? Calculate how much the central bank needs to transact.

BEO2000 Study Guide - Final Guide: Money Multiplier, Reserve Requirement, Excess Reserves

Document Summary

Get access

Related Documents

BEO2000 Lecture Notes - Lecture 3: Financial Institution, Credit Risk, Liquidity Premium

BEO2000 Lecture Notes - Lecture 5: Australian Dollar, Fractional-Reserve Banking, Money Supply

ECON1102 Study Guide - Final Guide: Commercial Bank, Excess Reserves, Monetary Base

Related Questions