Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Question
Chapter 25, Problem 17SQ
To determine
The size of extension in the loan capacity.
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Assume we have a simplified banking system in balance-sheet equilibrium. Also assume thatall banks are subject to a uniform 10 percent reserve requirement and demand deposits arethe only form of money. A commercial bank receiving a new demand deposit of $100 wouldbe able to extend new loans in the amount of:
Group of answer choices
$1,000.
$10.
$100.
$90.
Suppose that the Federal Reserve (the "Fed") buys $1.5 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction?
A. The banking system's holdings of securities rise by $1.5 million, and the banking system's total reserves fall by $1.5 million.
B. Checkable deposits rise by $1.5 million, and the banking system's holdings of securities rise by $1.5 million.
C. Checkable deposits rise by $1.5 million, and the banking system's total reserves rise by $1.5 million.
D. The banking system's holdings of securities fall by $1.5 million, and the banking system's total reserves rise by $1.5 million.
Suppose that in a given month $52 million is deposited into the banking system while $60 million is withdrawn. Also suppose that the Fed has set the reserve requirement at 8 percent and that banks have no excess reserves at the beginning of the month. What is the maximum amount of new checkable-deposit money that can be created (or removed) by the banking system as a result of these deposits and withdrawals?
Instructions: Enter your answer as a whole number. Enter a positive number to show an increase and a negative number (−) to show a decrease.
$ million
Chapter 25 Solutions
Economics For Today
Ch. 25.3 - Prob. 1YTECh. 25 - Prob. 1SQPCh. 25 - Prob. 2SQPCh. 25 - Prob. 3SQPCh. 25 - Prob. 4SQPCh. 25 - Prob. 5SQPCh. 25 - Prob. 6SQPCh. 25 - Prob. 7SQPCh. 25 - Prob. 8SQPCh. 25 - Prob. 9SQP
Ch. 25 - Prob. 10SQPCh. 25 - Prob. 11SQPCh. 25 - Prob. 1SQCh. 25 - Prob. 2SQCh. 25 - Prob. 3SQCh. 25 - Prob. 4SQCh. 25 - Prob. 5SQCh. 25 - Prob. 6SQCh. 25 - Prob. 7SQCh. 25 - Prob. 8SQCh. 25 - Prob. 9SQCh. 25 - Prob. 10SQCh. 25 - Prob. 11SQCh. 25 - Prob. 12SQCh. 25 - Prob. 13SQCh. 25 - Prob. 14SQCh. 25 - Prob. 15SQCh. 25 - Prob. 16SQCh. 25 - Prob. 17SQCh. 25 - Prob. 18SQCh. 25 - Prob. 19SQCh. 25 - Prob. 20SQ
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- Label each of the following statements true, false, or uncertain. Explain briefly.a) The term investment, as used by economists, refers to the purchase of bonds andshares of stock b) The central bank can increase the supply of money by selling bonds in the marketfor c) Bond prices and interest rates always move in opposite directions. d) If government spending and taxes increase by the same amount, the IS curve doesnot shift. e) When banks hold only a fraction of deposits in reserve, banks create money. At theend of this process of money creation, the economy is more liquid in the sense that thereis more of the medium of exchange, and the economy is wealthier than before.arrow_forwardWorking through an open-market operation Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves. Assets Liabilities and Net Worth (Billions of Dollars) Total reserves 4 Checkable deposits 20 Loans 11 Securities 5 Total 20 Total 20 What is the required reserve ratio? a. 5% b.10% c.20% d. 25% Suppose that the Federal Reserve (the “Fed”) sells $1.5 million of bonds to a bond dealer, who pays the Fed by writing a check against the funds in her checking account. What is the initial impact of this transaction? (a) The banking system's holdings of securities rise by $1.5 million, and the banking system's total reserves fall by $1.5 million. (b)Checkable deposits fall by $1.5 million, and the banking system's holdings of securities fall by $1.5 million. (c) Checkable deposits fall by $1.5 million, and the banking system's…arrow_forwardHi, can someone help me with this question? Thank you in advance. 1. Suppose the Central Bank has just announced a higher overnight interest rate, thereby decreasing the desire for new loans. A commercial bank is holding excess reserves and wants to buy $46,000 of government bonds from the CB (which they are willing to sell). a. What is the immediate change in the Central Bank’s assets and liabilities? b. What is the immediate change in the commercial bank’s assets?arrow_forward
- Scenario: Aggregate banking statistics show that collectively the banks of CountryA hold $300 million of required reserves, $75 million of excess reserves, have issued $7,500 million of deposits, and hold $225 million of Treasury bonds, and the left $6900 million is all loaned out. Citizens of CountryA prefer to use only demand deposits and so all money is on deposit at the bank. Suppose that the Bank of countryA changes the reserve requirement to 3 percent. Assuming that the banks still want to hold the same amount of excess reserves, what is the value of the money supply after banks eventually adjust everything to the change in the reserve requirement? Group of answer choices: A:$9,375 million B：$10,000 million C：$10,625 million D：$7,500 million Please provide detailed reasoning about this question.arrow_forwardIn an economy ‘a la Diamond and Dybvig (1983)1 where the long-term investment has a return of R = 2.25, and the bank offers r1 = 1.25 for early withdrawals or r2 = 1.947 for late withdrawals, would 58% of depositors withdrawing in the first period generate a bank run? a. Yes b. Yes, but only if late depositors would earn a return less than r2 c. No d. Yes, but only if there is deposit insurance in placearrow_forwardBank credit creation is seen by Werner as a reason for the Japanese economic boom in the 80’s and subsequent collapse in the 90’s, and generally boom bust cycles occur, because, (a) Banks were merely intermediaries, taking deposits and giving loans, causing the rise and fall. (b) “Good” debt from asset lending allowed banks to lend to the real sector increasing nominal GDP, when asset prices fell, the “bad” debt caused banks to withdraw credit to the real sector causing a recession. (c) Banks lent heavily to assets, causing asset prices to rise and then withdrew credit from assets causing a collapse (d) Both (b) and (c) (e) All of the abovearrow_forward
- Assume that the bank makes these loans. What will the new balance sheet look like? By how much has the money supply increased or decreased? If the money multiplier is 5, how much money will ultimately be created by this event?arrow_forwardAssume that the going rate of interest in langston is 4% . However the fed set the current reserve requirements for bank at a mere 5%. Which the banks choose not to exeed . After computing the miney multiplier how much money would become available in langston economy if $100000 was deposited in the bank?arrow_forwardWhich of the following factors pose a limit on the ability of commercial banks to increase the quantity of money in circulation by extending new loans? Select one or more: a. the quantity of Central Bank reserves that they own b. the quantity of money that savers lent to them by opening deposits c. the behavior of households and firms, which reduce the quantity of money in circulation by repaying previous loans. d. the availability of profitable lending opportunities in the economy e. the willingness of household and firms to take up new debts at the given interest ratearrow_forward
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