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Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 32

Money Creation - all with Video Answers

Educators

Chapter Questions

02:24

Problem 1

Why must a balance sheet always balance? What are the major assets and claims on a commercial bank's balance sheet? LOI

Mihir Nayar
Mihir Nayar
Numerade Educator
02:43

Problem 2

KEY QUESTION Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? IIow do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves? LO2

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:24

Problem 3

"Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced." Do you agree? Explain why or why not. LO3

Mihir Nayar
Mihir Nayar
Numerade Educator
02:07

Problem 4

KEY QUESTION "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed." Fxplain. LO3

Mihir Nayar
Mihir Nayar
Numerade Educator
02:43

Problem 5

Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio? $L O 4$

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
03:06

Problem 6

Assume that Jones deposits $\$ 500$ in currency into her checkable-deposit account in First National Bank. A halfhour later Smith obtains a loan for $\$ 750$ at this bank. By how much and in what direction has the money supply changed? Fxplain. LO3

Mihir Nayar
Mihir Nayar
Numerade Educator
02:04

Problem 7

Suppose the National Bank of Commerce has excess reserves of $\$ 8000$ and outstanding checkable deposits of \$150,000. If the reserve ratio is 20 percent, what is the sixe of the bank's actual reserves? $L O 4$

Mihir Nayar
Mihir Nayar
Numerade Educator
10:26

Problem 8

KEY QUESTION Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent: $L O 5$
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 cntire 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.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
04:18

Problem 9

The Third National Bank has reserves of $\$ 20,000$ and checkable deposits of $\$ 100,000 .$ The reserve ratio is 20 percent. Households deposit $\$ 5000$ in currency into the bank that is added to reserves. What level of excess reserves does the bank now have? $L O 4$

Mihir Nayar
Mihir Nayar
Numerade Educator
04:18

Problem 10

Suppose again that the Third National Bank has reserves of $\$ 20,000$ and checkable deposits of $\$ 100,000 .$ The reserve ratio is 20 percent. The bank now sells $\$ 5000$ in securities to the Federal Reserve Bank in its district, receiving a $\$ 5000$ increase in reserves in return. What level of excess reserves does the bank now have? Why does your answer differ (yes, it does! from the answer to question $9 ?$ LO4

Mihir Nayar
Mihir Nayar
Numerade Educator
02:09

Problem 11

Suppose a bank discovers that its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds market? Now assume the bank finds that its reserves will be substantially and permanently deficient. What remedy is available to this bank? (Hint: Recall your answer to question 4.) LO4

Alison Tintera
Alison Tintera
Numerade Educator
04:40

Problem 12

Suppose that Bob withdraws $\$ 100$ of cash from his checking account at Security Bank and uses it to buy a camera from Joe, who deposits the S100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which
(a) Security Bank finds itself short of required reserves,
(b) Serenity Bank finds it has excess reserves, and $(c)$ loans, checkable deposits, and the money supply change as a result of the transactions. $L O 4$

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
10:26

Problem 13

KEY QUESTION Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is
25 percent. LO5
a. What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking system might lend? Show in column 1 how the consolidated balance sheet would look after this amount has been lent. What is the monetary multiplier?
b. Answer the questions in part $a$ assuming the reserve ratio is 20 percent. Explain the resulting difference in the lending ability of the commercial banking system.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
08:26

Problem 14

LAST WORD Explain how the bank panics of 1930 to 1933 produced a decline in the nation's money supply. Why are such panics highly unlikely today?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator