The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 15

The Money Supply Process - all with Video Answers

Educators

Chapter Questions

Problem 1

Classify each of these transactions as an asset, a liability, or neither for each of the "players" in the money supply process - the Federal Reserve, banks, and depositors.
a. You get a $\$ 10,000$ loan from the bank to buy an automobile.
b. You deposit $\$ 400$ into your checking account at the local bank.
c. The Fed provides an emergency loan to a bank for $\$ 1,000,000$
d. A bank borrows $\$ 500,000$ in overnight loans from another bank.
e. You use your debit card to purchase a meal at a restaurant for $\$ 100$

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

The First National Bank receives an extra $\$ 100$ of reserves but decides not to lend out any of these reserves. How much deposit creation takes place for the entire banking system?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 3

Suppose the Fed buys $\$ 1$ million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

If a bank depositor withdraws $\$ 1,000$ of currency from an account, what happens to reserves, checkable deposits, and the monetary base?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

If a bank sells $\$ 10$ million of bonds to the Fed to pay back $\$ 10$ million on the loan it owes, what is the effect on the level of checkable deposits?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

If you decide to hold $\$ 100$ less cash than usual and therefore deposit $\$ 100$ more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

- The Fed can perfectly control the amount of reserves in the system " Is this statement true, false, or uncertain? Explain

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 8

"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base." Is this statement true, false, or uncertain? Explain.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 9

The Fed buys $\$ 100$ million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

Describe how each of the following can affect the money supply: (a) the central bank; (b) banks; and (c) depositors.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

The money multiplier is necessarily greater than 1 Is this statement true, false, or uncertain? Explain your
answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 12

What effect might a financial panic have on the money multiplier and the money supply? Why?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 13

During the Great Depression years from $1930-1933$ both the currency ratio $c$ and the excess reserves ratio $e$ rose dramatically. What effect did these factors have on the money multiplier?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 14

In October $2008,$ the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 15

The money multiplier declined significantly during the period $1930-1933$ and also during the recent financial crisis of $2008-2010$. Yet the M1 money supply decreased by $25 \%$ in the Depression period but increased by more than $20 \%$ during the recent financial crisis. What explains the difference in outcomes?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 16

If the Fed sells $\$ 2$ million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

If the Fed sells $\$ 2$ million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 18

If the Fed lends five banks a total of $\$ 100$ million but depositors withdraw $\$ 50$ million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 19

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends \$1 million to the First National Bank.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 20

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $\$ 2$ million of bonds to the First National Bank.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 21

If the Fed buys $\$ 1$ million of bonds from the First National Bank, but an additional $10 \%$ of any deposit is held as excess reserves, what is the total increase in checkable deposits? (Hint: Use T-accounts to show what happens at each step of the multiple expansion process.)

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 22

If reserves in the banking system increase by $\$ 1$ billion because the Fed lends $\$ 1$ billion to financial institutions, and checkable deposits increase by $\$ 9$ billion, why isn't the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for the banking system in equilibrium.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 23

If the Fed reduces reserves by selling $\$ 5$ million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will have happened to the level of checkable deposits?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 24

If the Fed sells $\$ 1$ million of bonds and banks reduce their borrowings from the Fed by $\$ 1$ million, predict what will happen to the money supply.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Suppose that the required reserve ratio is $9 \%$ currency in circulation is $\$ 620$ billion, the amount of checkable deposits is $\$ 950$ billion, and excess reserves are $\$ 15$ billion.
a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $\$ 1,300$ billion due to a sharp contraction in the economy, Assuming the ratios you calculated in part
(a) remain the same, predict the effect on the money supply.
c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of cxcess reserves, the excess reserve ratio, the money supply, and the money multiplier?
Following the financial crisis in $2008,$ the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the Ml money multiplier was below I for most of the time from October 2008 through 2011 How does this relate to your answer to the previous step?

Majid Borumand

Numerade Educator