Chapter 13, Money, Banks, and the Federal Reserve Video Solutions, Macroeconomics: Principles and Applications

Problem 1

Suppose the required reserve ratio is 0.2 . If an extra $$\$ 20$$ billion in reserves is injected into the banking system through an open market purchase of bonds, by how much will the money supply increase? Would your answer be different if the required reserve ratio were 0.1 ?

Xiaomin Bian

Numerade Educator

01:05

Problem 2

If the Fed buys $$\$ 50$$ million of government securities, by how much will the money supply increase if the required reserve ratio is 0.15 ? How will your answer be different if the required reserve ratio is 0.18 ?

Narayan Hari

Numerade Educator

01:31

Problem 3

Which of the following is considered part of the U.S. money supply? (Use the M1 measures.)
a. A $$\$ 10$$ bill you carry in your wallet
b. A $$\$ 100$$ traveler's check you bought but did not use
c. A $$\$ 100$$ bill in a bank's vault
d. The $$\$ 325.43$$ balance in your checking account
e. A share of General Motors stock worth $$\$ 40$$

Andrew Davis

Numerade Educator

04:40

Problem 4

Suppose a country, Zeekland, uses a unit of account called the "zeek." Its banks have no reserve requirements, but banks always want to hold 3 percent of their total checking deposits as cash, and another 2 percent as accounts with the Zeekland Central Bank. If the central bank buys 50 million zeeks worth of government bonds, by how much will the country's money supply increase?

Yi Chun Lin

Washington University in St Louis

02:30

Problem 5

Suppose accountants at Mid-Size National Bank (Table 1) discover that they've made an error: Cash in vault is only $$\$ 8$$ million, not $$\$ 10$$ million.
a. Which other entries in the bank's balance sheet will change as a consequence of discovering this error?
b. If the required reserve ratio is 0.10 , does this bank now have excess reserves or deficient reserves? Of what value?

Xiaomin Bian

Numerade Educator

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Problem 6

Suppose that Mid-Size National Bank has the balance sheet in Table 1. One day, a hurricane destroys 20 percent of its property and buildings, and its insurance covers only half this amount. Illustrate (with new entries) how its balance sheet will change.

Majid Borumand

Numerade Educator

02:13

Problem 7

Suppose that the money supply is $$\$ 1$$ trillion. Decision makers at the Federal Reserve decide that they wish to use open market operations to reduce the money supply by $$\$ 100$$ billion, or by 10 percent. If the required reserve ratio is 0.05 , and the simple money multiplier formula applies, what does the Fed need to do to carry out the planned reduction?

Kaylee Mcclellan

Numerade Educator

01:05

Problem 8

Suppose that the money supply is $$\$ 3.2$$ trillion. Decision makers at the Federal Reserve decide that they wish to use open market operation to increase the money supply by $$\$ 500$$ billion. If the required reserve ratio is 0.10 , what does the Fed need to do to carry out the planned increase? What if the required reserve ratio is 0.15 ?

Narayan Hari

Numerade Educator

04:23

Problem 9

For each of the following situations, determine whether the money supply will increase, decrease, or stay the same.
a. Depositors become concerned about the safety of depository institutions.
b. The Fed lowers the required reserve ratio. (Assume banks never hold excess reserves.)
c. The economy enters a recession and banks have a hard time finding credit-worthy borrowers.
d. The Fed sells $$\$ 100$$ million of bonds to First National Bank of Ames, Iowa; banks never hold excess reserves; and the public doesn't change its cash holdings.
e. The Fed buys $$\$ 100$$ million of bonds from First National Bank of Ames, Iowa, but the interest rate banks can earn from lending is the same as the interest rate the Fed pays on reserves.

Ben Meadows

Numerade Educator

Problem 10

Suppose a bank has the following entries on its balance sheet: $$\$ 20$$ million in property and buildings; $$\$ 200$$ million in government bonds; $$\$300$$ million in loans; $$\$ 5$$ million cash in vault; $$\$ 95$$ million in accounts with the Federal Reserve; $$\$ 550$$ million in checking account liabilities. There are no other entries on the balance sheet except for shareholders' equity.
a. What is this bank's "capital?"
b. What is the maximum value of the bank's loans that could be "written off" due to bankruptcies before the bank would become insolvent?

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02:30

Problem 11

Suppose that Mid-Size Bank has the balance sheet in Table 1 , and is required by law to have 20 percent of its total assets as bank capital.
a. What percentage of total assets is Mid-Size's current level of capital?
b. Suppose Mid-Size issues new shares of stock, which it sells for $$\$ 75$$ million. It then lends out the $$\$ 75$$ million. Is Mid-Size meeting its capital requirement now? Why or why not?
c. [Harder] How many dollars would Mid-Size have to raise by selling shares of stock to exactly meet its capital requirement? (Assume it will always lend out the proceeds of any stock sale.)

Xiaomin Bian

Numerade Educator

02:30

Problem 12

Suppose that Mid-Size National Bank has the balance sheet in Table 1 and is required by law to have 20 percent of its total assets as bank capital.
a. What is the maximum simple leverage ratio Mid-Size is permitted to have?
b. What is Mid-Size's actual simple leverage ratio?
c. Suppose Mid-Size decides to bring its leverage ratio down to the maximum permitted level by selling some assets and using the proceeds to pay off some of its debts and checking deposits. How much in assets would it have to sell?

Xiaomin Bian

Numerade Educator

02:30

Problem 13

Suppose that Mid-Size National Bank has the balance sheet in Table 1, and one day, the value of every asset it holds (including its loans) decreases by 5 percent.
a. What is Mid-Size's leverage ratio now?
b. Suppose Mid-Size wants to bring its leverage ratio back to its original level, by selling assets at their current lower value, and using the proceeds to pay off its debts or reduce its deposits. How much in assets must Mid-Size sell?

Xiaomin Bian

Numerade Educator