Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 14, Problem 6DQ
To determine
The process of election of chairperson of FED and the purpose of FOMC.
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Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent:a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount. b. By how much has the supply of money changed? Explain. c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in column 2. d. Answer questions a, b, and c on the assumption that the reserve ratio is 15 percent.
Since the Fed has begun paying interest on bank reserves at the Fed, do barks still want to avoid holding excess reserves?
Context: If lending was more profitable than the currently very low interest rate (formerly zero) that could be received from the Fed on excess reserves, we would still normally expect barks to lend out excess reserves rather than maintain them as excess reserves Judging from the fact that there has been a huge increase in holdings of excess reserves in the barking system, however, there may well be other constraints (such as Basel III) that may be limiting bank's willingness to lend out excess reserves.
The table below reports the breakdown of assets and liabilities for all commercial banks for January 2020, two months before the start of the COVID-19 recession, and December 2020.
Assets (in billions of dollars)
Liabilities (in billions of dollars)
Jan-20
Dec-20
Jan-20
Dec-20
Loans
$10,041.54
$10,376.47
Deposits
$13,293.30
$16,061.82
Reserves
$1,768.52
$3,168.94
Borrowings
$1,965.90
$1,715.81
Treasury Securities
$3,008.19
$3,726.10
Other Liabilities
$593.42
$825.74
Other Assets
$2,984.52
$3,224.45
Total Assets
$17,802.77
$20,495.96
Total Liabilties
$17,802.77
$20,495.96
From January to December, the net worth of banks changed by $___ billion (round your answer to two decimal places).
Chapter 14 Solutions
Macroeconomics
Ch. 14 - Prob. 1DQCh. 14 - Prob. 2DQCh. 14 - Prob. 3DQCh. 14 - Prob. 4DQCh. 14 - Prob. 5DQCh. 14 - Prob. 6DQCh. 14 - Prob. 7DQCh. 14 - Prob. 8DQCh. 14 - Prob. 9DQCh. 14 - Prob. 10DQ
Ch. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - The three functions of money are: LO14.1 a....Ch. 14 - Prob. 2RQCh. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 5RQCh. 14 - Prob. 6RQCh. 14 - Prob. 7RQCh. 14 - Prob. 8RQCh. 14 - Prob. 9RQCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - Prob. 4PCh. 14 - Prob. 5P
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- Bank A has $5,000 in reserves, all required to be held. The required reserve ratio is 10 percent. Bank A has checkable deposits of O $500. O $5,000. O $50,000. O $500,000.arrow_forward25) The graph above shows the market for a one-year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This will result in the private-sector borrowing to be crowded out by X dollars. What is the value of X? O. 50 O. 100 O. 150 O. 200 26). The graph above shows the market for a one year discount bond with a face value of $1,000. The government's budget deficit increases by $150 million and to finance that deficit it borrows in this market. This results in the private-sector borrowing to be crowded out. At the end, the private sector will end up borrowing X dollars. What is the value of X? O. 50 O. 100 O. 150 O. 200 O. 250arrow_forward54) If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why? 55) What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically. 56) What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term? 57) When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?arrow_forward
- Question 1) Explain what will happen to M1 and M2 measures of money supply if an individual moves money from demand deposit account to a small-denomination time deposit. Question 2) Issuing marketable securities is the primary way businesses finance their operations. Trueor false? Explain your answer. If a four-year bond with a $2000 face value has a coupon rate of 2.5%, and the currentmarket interest rate is 4%, what is the market price of the bond? If this bond sold for $1900, is theyield to maturity greater or less than 4%? Why?arrow_forwardAssume that the balance sheet of a bank in your assigned country as below:Assets LiabilitiesReserves $5,000 Deposits $40,000Loans $45,000 Capital $10,000a. If the required reserve ratio is 3 percent, then how much does this bank has excessreserves?b. Suppose a bank purchases $1,500 of government securities using funds from reserves.How much do bank assets change as a result of this transaction? Show the change inthe balance sheet above. How much does Money Supply change due to this transaction?c. Calculate the bank’s leverage ratio. What is the maximum decrease (in %) in the marketvalue of assets before the bank becomes insolvent?arrow_forward7 Suppose that liabilities of the Central Bank are 90% reserves and 10% currency, and currency is not held by banks. Further, a 30% reserve/deposit limit for banks exists, and households hold 10% of their assets in currency, and the rest in deposits. A $1 increase in central bank liabilities at the stated 90/10 ratio leads to what $ increase in M2? [please answer the question NOT in %, but in absolute numbers]arrow_forward
- 2. Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (1), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation. part 1 answer DRR = Ratio (4% or 0.04) CDR = % of money in wallets (3% or 0.03) = (1 + 0.03) / (0.04 + 0.03) = 1.03 / 0.07 Answer = 14.71 Therefor Every $1 in the bank will allow the bank to create $14.71arrow_forward9. How would you incorporate security considerations/costs into the transactions demand model? What would this imply for the demand for currency in a relatively insecure urban environment (a) compared with a relatively safe one, (b) when owner-identified smart cards become available? Do these factors affect the demand for demand deposits? How would the proportion of currency to demand deposits be affected in these cases? 10. Can the transactions demand model be used to explain why financial innovations in recent decades have reduced the transactions demand for M1? 11. Are transactions demand models useless, as Sprenkle (1969) argued? If they are, how would you explain the demand for M1 or just for demand deposits in the economy?arrow_forward7. The Federal Reserve has raised the Federal Funds rate by 3.75 percent within the past year. Ifa bank had capital of 10 percent when the Fed began raising rates and has no loans at risk ofdefault, under what circumstances will its capital position be compromised? Please be specific.8. How do rising interest rates affect the size of real estate loans that lenders will advance?Again, be specific.9. Mortgage rates have risen by about 4 percent over the past year. Does that mean that theacceptable minimum appreciation rate for looking at owner housing relative to renting hasrisen by 4 percent? Why or why not? (Hint: think about our analysis of the buy-rent decision).10. You are evaluating a CMBS. Beyond the standard metrics (i.e., LTV, DCI, etc.), name twothings to consider in evaluating the security.arrow_forward
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