Unit III:
Macroeconomics
Chapter 14, 15: Fiscal Policy
Chapter10/16: Monetary Policy
Macroeconomic Concepts
SSEMA1 The student will illustrate the means by which economic activity is measured.
a. Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of
households, businesses, government, and net exports.
b. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and
aggregate supply and aggregate demand.
c. Explain how economic growth, inflation, and unemployment are calculated.
d. Identify structural, cyclical, and frictional unemployment.
e. Define the stages of the business cycle, as well as recession and depression.
f. Describe the difference between the national debt and government deficits.
SSEMA2 The student will explain the role and functions of the Federal Reserve System.
a. Describe the organization of the Federal Reserve System.
b. Define monetary policy.
c. Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic
growth.
SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full
employment, and economic growth.
a. Define fiscal policy.
b. Explain the government’s taxing and spending decisions.
Unit III: Macroeconomics
Chapter
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Standards
EMA1a,b,d,e
EMA1c, EPF3a
EPF 3,b,c
EMA1f, EMA3,a,b
EMA2a,b,c
Standards Update Sheet
Name:________________________________Class:_______________Instructor:___________________
+
mastery
Standard
SSEMA1a
SSEMA1b
SSEMA1c
SSEMA1d
SSEMA1e
SSEMA1f
SSEMA1g
SSEMA2a
SSEMA2b
SSEMA2c
SSEMA3a
SSEMA3b
- needs improvement
Activity
Activity
Activity
Activity
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Unit III: Macroeconomics
14:
Vocabulary
FIB Notes
Daily 10
Current Events
Chapter Activity
Written Response
Study Guide
Participation
Total
15:
Vocabulary
FIB Notes
Daily 10
Current Events
Chapter Activity
Written Response
Study Guide
Participation
Total
10/16:
Vocabulary
FIB Notes
Daily 10
Current Events
Chapter Activity
Written Response
Study Guide
Participation
Total
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Final Unit II Test
/100
Chapter 14 – Taxes and Government Spending
Section 1 – What are Taxes?
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•
•
•
Tax – a required payment to a ______________________, ______________________, or
______________________ government
– Income, _________________, property, ______________________, etc.
Revenue – income received by the government from ___________________________
Tax Base – income, ______________________, ______________________that is subject to a tax
Tax Structures
• Proportional Tax – % of income taxes _________________________________________________ (__________
tax)
• Progressive Tax – % of income paid in taxes ____________________________________________
(______________________tax)
• Regressive Tax - % of income paid in taxes ____________________________________________ (_________
tax)
Characteristics of a Good Tax
1. Simplicity – easy to ______________________, keep records, prepare ______________________, anticipate
__________________________________
2. Efficiency – easy to ______________________, taxpayers should not ______________________or take too
much __________________ to pay
3. Certainty – clear ______________________, amount to be__________________, how
______________________
4. Equity – ___________________, so not one person __________________________ or
______________________of the tax burden
Individual Income Taxes
• “Pay-As-You-Earn” Taxation – taxes are paid based on ___________________________; individuals pay income
taxes _________________________________________
• Tax Withholding – tax payments taken out of employees pay
____________________________________________; ensures _______________________________________
• Tax Return – form used to __________________________________; declare
_______________________________
• Taxable Income – A person’s gross income ______________________ exemptions and
______________________
•
•
•
Personal Exemptions – set amounts that you ______________________ from your
__________________________
• 0, 1, 2, 3, 4, 5, 6, etc
Deductions – amounts you can ____________________, or ______________________from your gross income.
• Interest on a _________________, children, ___________________, religious, ___________________,
etc.
Tax Bracket – scheduled rate at which you are ______________________ based on your
______________________
Corporate Income Taxes
• FICA (Federal Insurance Contributions Act) – funds _________________________and
________________________
• Social Security – funds people of ______________________, survivors and ______________________,
established in 1935, originally to provide ______________________pensions of workers
• Medicare – national ___________________________program that helps pay for people over age of ________ or
with ____________________________________
• Medicaid – national health insurance for people
_______________________________________________________
• Unemployment – insurance for workers laid off through _____________________________________________
Other Types of Taxes
• Excise tax – tax on ______________________, cigarettes, ______________________, phone service, cable,
______________________, etc.
• Estate tax – “_________________ tax”, tax on ______________________ or value of money and
______________________ of a person who ______________________
• Gift tax – tax on money or ______________________ that one living person ____________________________;
a person can give up to ______________________a year tax-free per individual
• Tariff – ______________________ tax on foreign goods brought
________________________________________
Daily Assignment Questions – Ch. 14 Section 1 pgs. 359 – 360
*Answer in complete sentences*
1. How did taxes affect early American colonists?
________________________________________________________
2. What gives the government the right to tax U.S. citizens?
_______________________________________________
3. What is the purpose of taxation?
___________________________________________________________________
4. What are some things that are provided by the government through revenue?
______________________________
5. Where is the power to tax found in the Constitution?
___________________________________________________
6. What are the two limitations of taxes found in the taxation clause?
_______________________________________
7. What is Congress unable to tax?
____________________________________________________________________
8. What is a tax base?
______________________________________________________________________________
9. List the items that could be included in the tax base.
___________________________________________________
14.2 and 14.3: Federal Taxes and Federal Spending
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Fiscal Policy and The Federal Budget
• Fiscal Policy – the use of government ______________________ and ______________________________
to ____________________________________________
• Federal budget – a written document indicating the _________________________________the government
expects to ______________________ and how they will ______________________
– Released the first Monday in ______________________ each year
• Fiscal year – ______month period, ______________________ 1 – ______________________ 30
Creating The Federal Budget
• Step 1 – Federal agencies _____________________________; spending proposals are sent to the
____________________________________________ (OMB)
•
Step 2 – The OMB works with the ______________________ to create a ______________________, President
presents to ______________________
•
Step 3 – Congress ___________________________________to the budget and sends the amended budget to
the ______________________
•
Step 4 – The President ____________________________________________
Federal Spending
• Mandatory Spending – programs that lawmakers are _____________________________________to spend
money on (______________________, ______________________, ______________________, etc.)
•
Discretionary Spending – spending that government ______________________; ______________________ or
______________________ (______________________, environment, ______________________, etc.)
Budget Deficits and the National Debt
Balanced budget – money going into the U.S. Treasury is the same amount of money going out
– Revenue _____ Spending
– The last balanced budget occurred in ____________under President
______________________________
• Budget Surplus – occurs when the government takes in more than it spends
– Revenue _____ Spending
• Budget Deficit – occurs when the government spends more than it takes in
– Revenue _____ Spending
Dealing with a Budget Deficit
• Create money – the government can ______________________or
________________________________________
• Borrow money – government borrows money by ________________________________
– Bond is a type of loan with a ____________________________________________
– Bonds sold ____________________________________________
– China owns ______________________dollars in U.S. bonds
The National Debt
•
National debt – the total amount of money the federal government
______________________________________
•
•
Combination of all budget deficits over time
Budget deficit – the amount of money the government owes to
_________________________________________
Mandatory and Discretionary Spending Chart pgs. 371-373
Expansionary and Contractionary Fiscal Policies, pgs. 389-390
Word
Definition
Description
1. Purpose ________________________________
_______________________________________
Expansionary Fiscal Policies
2. Increase in government spending____________
_______________________________________
_______________________________________
3. Cutting Taxes ___________________________
_______________________________________
4. Purpose ________________________________
_______________________________________
Contractionary Fiscal Policies
5. Decrease in government spending ___________
_______________________________________
_______________________________________
1. Cutting Taxes ___________________________
_______________________________________
Tools of Fiscal Policy Chart
Fiscal Policy
1. The government cuts business and
personal income taxes and increases
its own spending.
2. The government increases the
personal income, Social Security and
corporate income tax.
3. Government spending goes up while
taxes remain the same.
4. The government reduces the wages
of its employees while raising taxes on
consumers and businesses.
Expansionary/
Contractionary
Explanation
Model of Aggregate Demand and Supply
Model used to explain ______________________________in economic activity around its long-run trend
• Aggregate - sum of all
____________________________________________________________________
• Two variables:
◦ Economy’s ________________________________________________
◦ Average ___________________________________________ (CPI or GDP Deflator)
Aggregate Demand
 Aggregate-_____________________________________________
 Sum of ______+______+______+______ (real _________) at each price level
 _____________________________________________
 Low price levels increase the quantity of _____________________________, vice versa
Why is the AD Curve Downward Sloping?
 Wealth effect – consumers are ________________________, which stimulates the
________________________________________________
 Interest rate effect – interest rates _____________________, which stimulates the
________________________________________________
 Exchange Rate effect – currency ________________________, which stimulates the
________________________________________________
Why the AD Curve Might Shift?
 Shifts arising from changes in consumption
◦ Decreases in ________________________– people become more concerned with
_______________________________________________________________
◦ Increases in spending – _____________________________________________
 Shifts arising from changes in investment
◦ Change in firm investing – tax ________________________, pessimism about
_____________________________________________, interest rates
 Shifts arising from changes in government purchases
◦ Congress ________________________/decreases ________________________
 Shift arising from changes in net exports
◦ Global ________________________ would cause a _____________________________________________
What Shifts the Aggregate Demand Curve?
Situation
Congress cuts taxes
Change in AD
New AD Curve
Business spending decreases
Government spending increases; no new taxes
Survey shows consumer confidence jumps
Stock collapses; investors lose billions
President cuts defense spending by 20%; no increase in
domestic spending
Effects of Fiscal Policy Chart
Scenario
1. National unemployment rate
rises to 12%
2. Inflation is strong at a rate of
14% per year.
3. Surveys show consumers are
losing confidence in the economy,
retail sales are weak and business
inventories are increasing rapidly
4. Business sales and investment
are expanding rapidly, and
economists think strong inflation
lies ahead.
5. The government eliminates the
deductibility of interest expense
for tax purposes
Expansionary/
Contractionary
Effect on
Federal
Budget
Objective
for
Aggregate
Demand
Action
on Taxes
Action on
Gov’t
Spending
Effect on
the
National
Debt
Daily Assignment Questions
State and Local Taxes and Spending
1. What does a states operating budget pay for? List examples.
____________________________________________
2. What does a state’s capital budget pay for? List examples
_______________________________________________
3. How do the state budgets differ from the federal government?
__________________________________________
4. Where are taxes spent? Describe each of the following:
1. Education
_______________________________________________________________________________
2. PublicSafety
___________________________________________________________________________
3. Highways and Transportation
________________________________________________________________
4. Public Welfare
___________________________________________________________________________
5. Arts and Recreation
_______________________________________________________________________
6. Administration
___________________________________________________________________________
CHAPTER 10 – Money and Banking
Section 1 – The Evolution of Money
 Money – assets people use to ________________________________________________________
 Three Functions of money:
1. ________________________________________________________
2. ________________________________________________________
3. ________________________________________________________
Functions of Money
 Medium of Exchange – payment for _____________________________________; buyers give sellers in
exchange for _________________________________________________________
 Barter system – economy that relies on
______________________________________________________________
 Unit of Account– an expression of _____________________________; a means for comparing the
_________________________ of _____________________________________________________
 Keeps track of ______________________________ and
__________________________________________
 Store of Value – money keeps its value if you decide to
_________________________________________________
 Helps people convert ________________________________________from present to
________________________________________
 Wealth – combination of all ________________________________________; both
________________________________________and ________________________________________ assets
Forms of Money
 Commodity money – money that has an
_____________________________________________________________
 Gold, _______________________, oil, _____________________, wheat, ________________________,
etc.
 Fiat – order/_________________________; ________________________________ issued money
 Paper/_____________________
 Representative – money that can be ______________________________________________________________
– IOU, ______________________, bonds, etc.
 Currency – _____________________ and _____________________________ used as money
Section 3 – Banking Today
Measuring the Money Supply
 Money supply – quantity of ____________________________________________________
 Liquidity – ease with which an ___________________________ (liquid asset) can be converted into
________________________________________/________________________________________
 Liquid – ________________________________________
 Nonliquid - ________________________________________
 M1 – money that people can gain access to _________________________and
___________________________________; checkable
________________________________________________.
– High liquidity - ________________________________________, traveler’s checks
 M2 – consists of all the assets in M1 plus __________________________________________________________
– Slightly less liquid - _________________________accounts, __________________________________,
________________________________, etc.
–
The Six Characteristics of Money – pgs. 245-246
Characteristic
Description
1. Durability
Examples
2. Portability
3. Divisibility
4. Uniformity
5. Limited Supply
6. Acceptability
The Functions of Financial Institutions – pgs. 259 - 262
Characteristic
Description
1. Storing Money
2. Saving Money
3. Loans
4. Mortgages
5. Credit Cards
6. Simple and
Compound Interest
7. Banks and Profit
Example s
Chapter 14 - 15 Study Guide
Taxes and Fiscal Policy – pgs. 359 – 409
1. A ___________________________________ is a required payment to local, state, or national government.
2. The income received by the government from tax collection is known as
_____________________________________.
3. The use of government spending and revenue collection (taxation) is known as ____________________________
policy
4. A ____________________________________income, property, good or service that is subject to a tax.
5. The percentage of income taken in taxes remains the same with a ________________________________________
tax.
6. The percentage of income in taxes increases as income increases with a ___________________________________
tax.
7. The percentage paid in taxes decreases as income increases with a _______________________________________
tax.
8. List the 4 characteristics of a good tax:
a. ______________________________________________________________________________________
b. ______________________________________________________________________________________
c. ______________________________________________________________________________________
d. ______________________________________________________________________________________
9. The idea that you pay taxes throughout the year as opposed to one lump sum is known as
_______________________________________________ taxation.
10. Tax _________________________________________ is the process of taking tax payments out of an employee’s
pay before she or she receives it.
11. The form you use to file income taxes is known as a ____________________________________________________
12. A person’s gross income minus exemptions and deductions is known as
_______________________________________
13. _____________________________________________ are set amounts that an individual can subtract from their
gross income for themselves, their spouse, and any of their dependents.
14. ____________________________________________ are variable amounts that you can subtract or deduct from
your gross income.
15. __________________________ taxes fund two large government programs, Social Security and Medicare.
16. ________________________ taxes are taxes on estate, or total value of the money and property of someone who
has died.
17. The __________________________ tax is a tax on money or property that one living person gives to another.
18. Taxes on imported goods are known as ________________________________________.
19. A _______________________________________________ is the use of taxation to encourage or discourage
behavior, such as an excise tax.
20. Mandatory spending refers to
_________________________________________________________________________
21. Discretionary spending refers to
_______________________________________________________________________
22. Entitlement programs are
____________________________________________________________________________
23. Briefly describe each of the following entitlement programs:
a. Social Security
_______________________________________________________________________________
b. Medicare
___________________________________________________________________________________
c. Medicaid
___________________________________________________________________________________
24. The largest portion of discretionary spending is budgeted for
________________________________________________
25. Other than defense, what are some additional areas that fall under discretionary spending?
______________________
26. A state’s ____________________________________________ budget pays for day to day expenses whereas their
_____________________________________ pays for major capital investments in roads, buildings, etc.
27. List the two differences between a state and federal government’s budget:
a. ______________________________________________________________________________________
b. ______________________________________________________________________________________
28. List the 6 areas that a state government uses their taxes:
a. ______________________________________________________________________________________
b. ______________________________________________________________________________________
c. ______________________________________________________________________________________
d. ______________________________________________________________________________________
e. ______________________________________________________________________________________
f. ______________________________________________________________________________________
29. The federal government’s revenues and spending for the coming year is the _____________________________
budget.
30. A fiscal year is a
____________________________________________________________________________________
31. Describe the 4 steps in creating a federal budget:
a. Step
1______________________________________________________________________________________
b. Step
2______________________________________________________________________________________
c. Step
3______________________________________________________________________________________
d. Step
4______________________________________________________________________________________
32. Fiscal policies that try to increase output in the economy are known as
_______________________________________
33. Fiscal policies intended to decrease output in the economy are
______________________________________________
34. How did the perspectives of classical economists such as Adam Smith, David Ricardo and Thomas Malthus differ
from that of John Maynard Keynes, Keynesian economics, with respect to fiscal policy (pgs. 395-396)?
a. Classical
Economics___________________________________________________________________________
b. Keyensian
Economics_________________________________________________________________________
35. A balanced budget is when
___________________________________________________________________________
36. A budget surplus occurs
_____________________________________________________________________________
37. A budget deficit occurs
______________________________________________________________________________
38. The national debt is
_________________________________________________________________________________
39. What is the difference between national debt and government budget deficits?
________________________________
40. Two things that the government can do to deal with a deficit are:
a. ________________________________________________________________________________________
b. ________________________________________________________________________________________
Chapter 16 – The Federal Reserve





The Federal Reserve
The Federal Reserve (“_________________________”) – the
____________________________________________
Created in _________________________
Monetary Policy – directly __________________________________________________
Responsible for regulating the __________________________________________________
Top of dollar “__________________________________________________”
Structure of the Federal Reserve
 Board of Governors - run by a __________________________________________________
 Appointed by the _________________________________, confirmed by the
_______________________________
to __________________________________________________
 Board is led by the _________________________
 Current chairman – _________________________________________
 Fed is comprised of _________________________________________________________
 One Federal Reserve Bank for ______________________________
 Each FRB
________________________________________________________________________________
The Federal Open Market Committee
Structure and function:
 Run by a __________________________________________________and ________of the 12 regional bank
presidents
 Increase or decrease the _________________________
The Fed’s Tools of Monetary Control
 Three monetary policy tools
1. __________________________________________________
2. __________________________________________________
3. __________________________________________________
Open-Market Operations
– Open-Market Operations – the purchase and sale of
_____________________________________________
– Most __________________________________________________
– Increase money supply, __________________________________________________
– Decrease money supply, _________________________________________________
Reserve Requirements
 Reserve Requirements – regulations on the
__________________________________________________________
– _______ on M1
– Influences how much money __________________________________________________ (reserves)
– Increase in RRR, banks must _____________________________________________, can
__________________________________________
– Decrease in RRR, banks must _______________________________________, can
__________________________________________
The Discount Rate
 Discount Rate – interest rate on loans the Fed _________________________; currently __________________%
– Fed is the ______________________________________
– Banks borrow from Fed when it has _____________________________; too many loans,
______________________________________
– Lower discount rate ____________________________________________
– Higher discount rate ____________________________________________
 Federal Funds Rate – _______________________ interest rate that banks charge each other for loans
– Currently _________________%
The Fed Today Video Questions
1. What is a U.S. $20 bill officially?_____________________________________________________________
2. How many forms of currency existed at one time during the 1800s? ___________________________________
3. Why did some people lose faith in the banking?
_______________________________________________________
4. What is the Fed’s primary goal?
___________________________________________________________________
5. What can a fast/slow money supply lead to? _______________________________________
6. Government securities are in the form of _____________
7. What is the transfer of money from one bank to cover a check called?
_____________________________________
8. How many checks does the Fed clear per year? ____________________________________________________
Money Creation
 Fractional-reserve system – banks hold only a _________________________________reserves as opposed to a
__________________________________________________
 Reserve – money deposit
________________________________________________________________________
– Reserves and loans are _________________________
– Loans are __________________________________________________
 Required Reserve Ratio – set by the Fed, minimum amount that
__________________________________________
– Established by the Federal Reserve, _____/______ or _______% of M1
 Excess Reserves – reserves in addition to ______________________________________________
– $1000 deposit, the bank would hold $_____________in reserve and have $______________for lending
Money Multiplier
 Money multiplier formula – is the amount of money that the
____________________________________________
– MM = __________
– Initial Cash Deposit (_________________________)
– The higher the ________________, the __________________________________________________
(vice versa)
– 100 (1/10) = ____________________
– 100 (1/.05) = ____________________
Personal Deposit
Person A
Deposit
(Money Supply)
Required Reserves (Assets)
Excess Reserves (Liabilities)
$2,000
Person B
Person C
Totals
RRR and Money Multiplier Review
A $2000 deposit is made in the bank and the RRR is 12%.
1. How much must be held as required reserves? ___________________________
2. How much will be available in excess reserves? ___________________________
3. How much could the initial deposit increase the money supply if the RRR was 12%? _______________________
4. How much could the initial deposit increase the money supply if the RRR was 10%? _______________________
5. How much could the initial deposit increase the money supply if the RRR was 5%? _______________________
6. Which RRR yielded the greatest amount? Explain why. ______________________________________________
____________________________________________________________________________________________
7.
Chapter 10 + 16 Study Guide
Chapter 10 – Money and Banking
1. ___________________________________ are the assets people use to buy goods and services.
2. Money is a ___________________________________________ , which serves as payment for products; buyers give
sellers in exchange for goods/services.
3. An economy that relies on trade of one product for another uses a ____________________________ sytem.
4. An expression of worth; a means for comparing the values of goods and services is money as a
___________________________________________________
5. Money as a _____________________________________ keeps its value if you decide to store it instead of spend it.
6. The combination of all stores of value; both money and nonmonetary assets is a person’s _____________________
7. Money that has alternative use as a commodity such as gold, silver, oil, corn, wheat, cotton, etc. “order/decree”
government issued money is known as a ________________________________________.
8. Money that can be exchanged for something of value IOU, Paper Receipts, bonds, etc. coins and paper bills used as
money is ______________________________________________ money.
9. The total quantity of money in the economy is the __________________________________________.
10. __________________________________ represents the ease with which an asset (liquid asset) can be converted into
money/medium of exchange.
11. Money that people can gain access to easily and immediately are known as _________________________deposits.
12. M____ represents the balances in bank accounts that have high liquidity - checking accounts, traveler’s checks
13. M____ consists of all the assets in M1 plus assets that are not as liquid that are slightly less liquid, savings accounts,
money market
14. List the 6 characteristics of money
1) ____________________________________________
2) ____________________________________________
3) ____________________________________________
4) ____________________________________________
5) ____________________________________________
6) ____________________________________________
Chapter 16 – The Federal Reserve and Monetary Policy
Section 1 – The Federal Reserve System
15. The Federal Reserve was established in ________________ , the nickname for the system is ___________________
and is composed of ______________________________________________________________________________
16. The Federal Reserve System is overseen by the _______________________________________________________,
which is headquartered in ________________________________________________________________________
17. How are the seven members appointed? ____________________________________________________________
______________________________________________________________________________________________
18. The process by which the government, central bank, or monetary authority of a country controls the supply of money,
availability of money, and cost of money or rate of interest, in order to promote growth and stability of the economy
is known as ________________________________________________ policy.
19. The Federal Reserve Act divided the United States into _______________ regional banks, one each serving their
district.
20. What purpose does each Federal Reserve Bank in its district serve? _______________________________________
______________________________________________________________________________________________
21. What is the advantage to having the Fed independent of a governmental agency? ___________________________
______________________________________________________________________________________________
22. The Federal Open Market Committee makes key decisions about the nation’s money _________________________
Section 2 – Federal Reserve Functions
Briefly describe each of service based roles of the Federal Reserve below:
23. Service Roles
a. Federal Government’s Banker_____________________________________________________________________
b. Government Securities Auction ___________________________________________________________________
c. Issuing Currency________________________________________________________________________________
d. Check Clearing _________________________________________________________________________________
e. Supervising Lending Practices _____________________________________________________________________
f. Lender of Last Resort ____________________________________________________________________________
24. Regulatory Roles
g. Reserves ______________________________________________________________________________________
_____________________________________________________________________________________________
h. Bank Examinations______________________________________________________________________________
_____________________________________________________________________________________________
i. Regulating the Money Supply_____________________________________________________________________
_____________________________________________________________________________________________
Section 3 – Monetary Policy Tools
25. The ___________________________________________________ is responsible for manufacturing money, while the
________________________________________________ is responsible for putting dollars into circulation.
26. How does the bank make money on your $1,000? _____________________________________________________
27. The amount that the bank is allowed to lend is determined by the ________________________________________
28. If you deposit $1,000 of borrowed money in a bank checking account, how much is the bank allowed to lend?
______________________________________________________________________________________________
29. The amount of money created in the end by an initial investment is the ____________________________________
30. Reserves that are greater than the required amounts are known as _______________________________________
31. How do banks respond to a lowered discount rate? ____________________________________________________
______________________________________________________________________________________________
32. How does a raised discount rate affect bank loans and the money supply? __________________________________
______________________________________________________________________________________________
33. What effect does the Fed’s purchase of government bonds have on the money supply? _______________________
______________________________________________________________________________________________
34. How does the Fed’s sale of the bonds reduce the money supply? _________________________________________
____________________________________________________________________________________________
Math Practice – Required Reserve Ratio and the Money Multiplier
35. If $2,000 is deposited in the bank, calculate how much the bank must hold in reserve for each of the following
reserve ratios, then calculate how much the bank can lend for each of the following reserve ratios.
Required Reserve Ratio
Required Reserves (Assets)
Excess Reserves (Liabilities)
1%
5%
10%
36. To illustrate how money can be "created", fill in the form shown below. We will begin with a few assumptions. The
Reserve Ratio is 10%. The bank lends all of its excess reserves to the next person on the list. That person deposits the
loan into their checking account.
Required Reserve
Ratio
Person A
Checking Deposit
(Money Supply)
$2,000
Required Reserves (Assets)
Excess Reserves (Liabilities)
Person B
Person C
Totals
37. Calculate the money multiplier for each of the following reserve ratios.
Required Reserve Ratio
Initial Deposit
1%
$2000
5%
$2000
10%
$2000
Money Multiplier
Increase in Money Supply