EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 33, Problem 7DQ
To determine
Mountain star bank and federal funds market.
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15 . Critical analysis Q15
Suppose that the Federal Reserve purchases a bond for $100,000 from Juan, who deposits the proceeds in the Manufacturer’s National Bank.
Initially, as a result of this bond purchase, the money supply will increase by $100,000.
If banks maintain reserves of 50% against their checking deposits, Manufacturer’s Bank will be able to extend $50,000.
In additional loans.If other banks also maintained reserves against their checkable deposits of 50%, the maximum potential expansion of the money supply would be $200,000.
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24. If velocity and aggregate output remain constant at 5 and $1,000 billion, respectively, what happens to the price level if the money
supply declines from $400 billion to $300 billion?
P. 478
(528 of 720)-
8. The reserve requirement, open market operations, and the moneysupply
Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States
before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of
demand deposits. To further simplify, assume the banking system has total reserves of $100. Determine the money multiplier as well as the money
supply for each reserve requirement listed in the following table.
Reserve Requirement
(Percent)
15
10
Simple Money Multiplier
A lower reserve requirement is associated with a
Money Supply
ollars)
money supply.
Suppose the Federal Reserve wants to increase the money supply by $100. Maintain the assumption 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…
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- Which of the following statements is true about bonds? 1) A bond's dollar price is calculated as a growth rate. 2) The dollar price and interest rate of a bond have a positive relationship. 3) Bonds can never default. 4) The dollar price and interest rate of a bond have an inverse relationship. 5) Bonds are ownership shares in a firm.arrow_forward4. Consider a money market in which there is an excess supply of money at the current interest rate. Then what likely to happen is the money supply curve will shift to the right until the demand for money equals the supply. the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money. the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money. the money supply curve will shift to the left until the demand for money equals the supply.arrow_forwardThe following graph shows a hypothetical demand function for federal funds . Currently , the total amount of reserves in the banking system is $ 50 billion , the discount rate is 3.5 percent , and interest on reserves equals IOR = 1 percent . If the Fed reduces the discount rate to 3.00 percent , the equilibrium federal funds rate ( FFR ) will equal : O a . FFR 3.00% O b . FFR = 2.50% O c . FFR = 2.00% O d . FFR 1.50% O e . None of the above.arrow_forward
- A headline reads: "Fed Cuts the Federal Funds Rate by Half a Point." This suggests that: 1) The prime interest rate will rise 2) Monetary policy has eased 3) Tax rates have been reduced. O4) The discount rate will risearrow_forwardA2-2. Suppose the consolidated balance sheet (T-account) of the banking system for an economy with a regulated reserve ratio of 10% is given below. If the regulator decreases the reserve ratio to 8%, the money supply will increase by 250. [Hint: Assume that the public holds all its money in the form of bank deposits.] Assets: Liabilities: Reserves 100 Deposits 1000 Government Bonds 300 Loans Outstanding Total 800 Capital Total 200 1200 1200arrow_forwardSuppose that Cat nation has $125 million in money. There is only one bank in Cat nation and it holds 15% of the deposits as reserves. What is the money multiplier in this economy? O 6.67 20 O 12.67 10arrow_forward
- In response to the Covid-19 recession of 2020, the Fed introduced temporary lending facilities that allowed it to make facility, allowed the Fed loans to businesses other than commercial banks. One of these facilities, known as the to provide funds directly to nonfinancial firms and state and local governments by either granting them loans or buying their bonds. liquidity leverage credit mortgage lenderarrow_forward6. One of the banking innovations in the 1960s was the payment of interest on certain types of demand deposits. Assume that interest is paid on money at the nominal rate Rm, which equals (R − x), where x is the nominal return on bonds, which is exogenously determined by market structures and the cost of servicing deposits. (i) Use Baumol’s transactions demand model to derive the demand function for money. (ii) Generalizing the above demand function to md(y, R, x), shows the behavior of the LM curve for shifts in x and P. (iii) What is the effect of an increase in x on aggregate demand, output and price level in the neoclassical model? (iv) Assuming that both R and x always increase by the expected rate of inflation, do (ii) and (iii) again.arrow_forwardTable 1 Balance Sheet Assets Liabilities Reserves $ 3,825 Deposit $17,000 Loans $13,175 Total Assets $17,000 Total Liabilities $17,000 ng Assume that this is the balance sheet of the only bank in this economy and that the money supply is entirely kept by the bank in either a checking or a savings account. Refer to Table 1. Assume that this is the balance sheet of the only banks in this economy: Given a reserve requirement of 7 percent, what is the maximum potential increase in the money supply in the economy? $37,642.9 O $34,000 O $36,400 O $30,812.5 O $46,750arrow_forward
- Figure 30-3 On the following graph, MS represents the money supply and MD represents money demand. O 2.0. O 14.3. O 2.9. VALUE OF MONEY O 0.35. 0.35 MS, 8000 MS₂ Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS₂; also suppose the economy's real GDP is 65,000 for the year. If the market for money is in equilibrium, then the velocity of money is approximately 13000 QUANTITY OF MONEY MDarrow_forwardSince 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.arrow_forward§Suppose that the T-account for First National Bank is as follows: Assets Liabilities Reserves: 90.000-TL Deposits: 500.000-TL Loans: 410.000-TL § §If the Central Bank requires banks to hold 10% of deposits as reserves, how much in excess reserves does First National Bank now hold? MM=1/rr MM=1/(10/100) MM=10 40000*10=400000TL §Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economy’s money supply increases?arrow_forward
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