Monetary Policy and Required Reserve Ratio

1. (Monetary Aggregates) Calculate M1 and M2 using the following information:

Large-denomination time deposits $ 304 billion

Currency and coin held by nonbanking public 438 billion

Checkable deposits 509 billion

Small-denomination time deposits 198 billion

Traveler’s checks 18 billion

Savings deposits 326 billion

Money market mutual fund accounts 637 billion

2. (Reserve Accounts) Suppose that a bank’s customer deposits $4,000 in her checking account. The required reserve ratio is 0.25. What are the required reserves on this new deposit? What is the largest loan that the bank can make on the basis of the new deposit? If the bank chooses to hold reserves of $3,000 on the new deposit, what are the excess reserves on the deposit?

3. (Money Multiplier) Suppose that the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05. How does this affect the simple money multiplier, assuming that excess reserves are held to zero and there are no currency leakages? What are the money multipliers for required reserve ratios of 0.15 and 0.20?

4. (Money Creation) Show how each of the following would initially affect a bank’s assets and liabilities.

a. Someone makes a $10,000 deposit into a checking account.

b. A bank makes a loan of $1,000 by establishing a checking account for $1,000.

c. The loan described in part (b) is spent.

d. A bank must write off a loan because the borrower defaults.

5. (Money Creation) Show how each of the following initially affects bank assets, liabilities, and reserves. Do not include the results of bank behavior resulting from the Fed’s actions. Assume a required reserve ratio of 0.05.

a. The Fed purchases $10 million worth of U.S. government bonds from a bank.

b. The Fed loans $5 million to a bank.

c. The Fed raises the required reserve ratio to 0.10.

6. (Monetary Control) Suppose the money supply is currently $500 billion and the Fed wishes to increase it by $100 billion.

a. Given a required reserve ratio of 0.25, what should it do?
b. If it decided to change the money supply by changing the required reserve ratio, what change should it make?

7. (Money Aggregates) What portion of U.S. Federal Reserve notes circulate outside the United States? How does this affect the United States?

8. (Creating Money) Often it is claimed that banks create money by making loans. How can commercial banks create money? Is the government the only institution that can legally create money?

Chapter 16 questions:

9. (Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. If the Fed uses open-market operations, should it buy or sell government securities?

c. 10. Determine whether each of the following increases, decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.

11. (Money Supply Versus Interest Rate Targets) Assume that the economy’s real GDP is growing.

a. What will happen to money demand over time?

b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time?

c. If the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time?

12. (Money Supply versus Interest Rate Targets) In recent years the Fed’s monetary target has been the federal funds rate. How does the Fed raise or lower that rate, and how is that rate related to other interest rates in the economy, such as the prime rate?

13. (Monetary Policy) What is the impact of a decrease in the required reserve ratio on aggregate demand?

14. (Quantity Theory of Money) The quantity theory states that the impact of money on nominal GDP can be determined without details about the aggregate demand curve, so long as the velocity of money is predictable. Discuss the reasoning behind this claim.