Monetary Policy and Required Reserve Ratio

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 3 (634 words) Published: December 8, 2013
1. (Monetary Aggregates) Calculate M1 and M2 using the following information:

Large-denomination time deposits $ 304 billion

Currency and coin held by nonbanking public 438 billion

Checkable deposits 509 billion

Small-denomination time deposits 198 billion

Traveler’s checks 18 billion

Savings deposits 326 billion

Money market mutual fund accounts 637 billion

2. (Reserve Accounts) Suppose that a bank’s customer deposits $4,000 in her checking account. The required reserve ratio is 0.25. What are the required reserves on this new deposit? What is the largest loan that the bank can make on the basis of the new deposit? If the bank chooses to hold reserves of $3,000 on the new deposit, what are the excess reserves on the deposit?

3. (Money Multiplier) Suppose that the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05. How does this affect the simple money multiplier, assuming that excess reserves are held to zero and there are no currency leakages? What are the money multipliers for required reserve ratios of 0.15 and 0.20?

4. (Money Creation) Show how each of the following would initially affect a bank’s assets and liabilities.

a. Someone makes a $10,000 deposit into a checking account.

b. A bank makes a loan of $1,000 by establishing a checking account for $1,000.

c. The loan described in part (b) is spent.

d. A bank must write off a loan because the borrower defaults.

5. (Money Creation) Show how each of the following initially affects bank assets, liabilities, and reserves. Do not include the results of bank behavior resulting from the Fed’s actions. Assume a required reserve ratio of 0.05.

a. The Fed purchases $10 million worth of U.S. government bonds from a bank.

b. The Fed loans $5 million to a bank.

c. The Fed raises the required reserve ratio to 0.10.

6. (Monetary Control) Suppose the money supply is currently $500 billion and the Fed wishes to increase it by $100 billion....
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