PROBLEM SET 5
Problems for Chapters 8 (pp. 232 – end) FED MONETARY POLICY
1.
Assume that Hometown Bank has demand deposits of $3,500,000, a reserve
requirement of 10 percent and actual reserves of $850,000. Determine the bank’s
required reserves and excess reserves.
Required reserves = _________________
Excess reserves = _________________
2.
If the Downtown Bank has $4,500,000 in deposits, a reserve requirement of 10
percent, and $500,000 in actual reserves, how much in new loans can it (ONE bank)
make?
New loans = _____________
3.
Assume that Fudge-It Bank has $3,000,000 in checkable deposits, a 15 percent
required reserve ratio and $520,000 in actual legal reserves. Based on these figures, what
is the maximum amount in new loans that Fudge-It Bank (ONE bank) can make?
New loans = ______________
4.
If the Fed increases excess reserves in the banking SYSTEM by $18 million with
a required reserve ratio of 12 percent, what is the maximum amount by which the money
supply could increase due to lending by ALL banks?
5.
Assume that the required reserve ratio is 12.5 percent and that $200,000 is added
to New Swindle Bank’s EXCESS reserves as a result of a change in Federal Reserve
Policy.
a.
What is the maximum amount of new loans that New Swindle Bank (ONE
bank) can make as a result of this increase in excess reserves?
b.
If the entire amount of New Swindle’s new loans were spent and the funds
were deposited in Jesse James Trust Company (another bank), what is the
maximum amount of new loans that Jesse James Trust can make?
c.
What is the maximum amount by which the entire banking SYSTEM can
increase loans as a result of the initial increase in New Swindle’s excess reserves
(see part a)?
d.
What is the maximum amount by which the entire banking SYSTEM can
increase loans following the initial increase in New Swindle’s excess reserves,
under the assumption that the required reserve ratio is 20 percent?
2
6.
Suppose the actual reserves of New Swindle Bank fall short of those required by
$100,000. Assuming a required reserve ratio of 10 percent, what will happen to the
amount of money created by the entire banking SYSTEM?
7.
What is the money multiplier and the maximum amount of new money that could
be created in the banking SYSTEM with an increase of $7,000,000 of excess reserves and
required reserve ratio of 15 percent?
Money multiplier = ____________
Maximum increase in money supply = _____________
8.
a.
If the Fed wants to INCREASE the money supply, how would it use each
of its three “tools” to do so?
b.
If the Fed wants to DECREASE the money supply, how would it use each
of its three “tools” to do so?
9.
How much in new excess reserves is created for a bank with deposits of
$10,000,000 and actual reserves of $3,500,000 when its reserve requirement is lowered
from 15 percent to 13 percent?
New excess reserves = _____________
10.
How much would Out-of-Town Bank need to borrow from the Fed or in the
Federal Funds Market if its deposits were $25,000,000, its required reserve ratio were 18
percent, and its actual reserves were $3,500,000?
Amount borrowed = ____________
TEXT, p. 246: “Test Your Understanding:” 1, 2, 4, 5, 8
TEXT, pp. 253-254: 5, 6(OMIT c), 7 (NOTE: #7 is a bit harder than the rest)
1.
SELECTED ANSWERS
RR = $3,500,000 x .10 = $350,000
ER = $850,000 - $350,000 = $500,000
2.
New loans = $50,000
3.
AR = $520,000
RR = 450,000 (.15 x 3,000,000)
ER = 70,000 ==> new loans = $70,000
4.
 M = $18 million x (1/.12) = $150 million
3
5.
a.
b.
c.
d.
$200,000 (An individual bank can only make loans up to its own excess
reserves)
AR = $200,000
RR = 25,000 (.125 x 200,000)
ER = 175,000 ==> new loans = $175,000
 loans =  M = $200,000 x (1/.125) = $1,600,000
 loans =  M = $200,000 x (1/.20) = $1,000,000
6.
It will decrease:  M = - $100,000 x (1/.10) = - $1,000,000
7.
Money multiplier = 1/.15 = 6.66666
Maximum increase in M = 7,000,000 x 6.66666 = 46,666,666
8.
See TEXT, pp. 247-249.
9.
ERs at r = .15: 2,000,000
ERs at r = .13: 2,200,000
New ERs = 2,200,000 – 2,000,000 = 200,000
10.
RR = $25,000,000 x .18 = 4,500,000
ER = 3,500,000 – 4,500,000 = - 1,000,000 ==> The bank is short of reserves and
therefore the amount borrowed is 1,000,000.
Text pp. 253-254
5. a. Decrease ER (to decrease M and increase i).
b. Increase required reserve ratio
Increase discount rate
Sell government securities
4
S’
6. a.
i
S
B
i1
A
D
L1
6. b.
L
i
S
B
i1
D’
A
D
L1
6. d.
L
i
S’
S
i1
A
B
D
L1
6. e.
L
i
S
i1
A
B
D’
L1
D
L
5
7.
Initial:
AR
40 mil. -
RR
=
30 mil. =
ER
10 mil.
a.
35 mil. 30 mil. =
5 mil.
Cut back lending because ERs decrease.
b.
40 mil. 36 mil. =
4 mil.
Cut back lending because ERs decrease.
c.
d.
No calculation, but reduces potential AR and therefore ER. Thus, cut
back lending.
50 mil. - 24 mil. =
26 mil.
Increase lending because ER increase.