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Chapter 29 - Problem Sets - Chosen

This document contains 11 problem sets related to monetary systems and banking. It addresses topics like how transactions affect bank balances, reserve requirements, money multipliers, and how central banks can influence money supply through open market operations and adjusting reserve requirements. Step-by-step calculations are provided to trace the effects of things like large withdrawals, changes in required reserves, and bond purchases/sales by the central bank.

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Minh Anh
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95 views2 pages

Chapter 29 - Problem Sets - Chosen

This document contains 11 problem sets related to monetary systems and banking. It addresses topics like how transactions affect bank balances, reserve requirements, money multipliers, and how central banks can influence money supply through open market operations and adjusting reserve requirements. Step-by-step calculations are provided to trace the effects of things like large withdrawals, changes in required reserves, and bond purchases/sales by the central bank.

Uploaded by

Minh Anh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 29: Monetary system

Problem sets
A 2. Your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check
from his TNB checking account. Use T-accounts to show the effect of this transaction on
your uncle and on TNB. Has your uncle’s wealth changed? Explain.

B 3. Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio
of 10 percent.
a. Show a T-account for BSB.
b. Now suppose that BSB’s largest depositor withdraws $10 million in cash from her account.
If BSB decides to restore its reserve ratio by reducing the amount of loans outstanding, show
its new T-account.
c. Explain what effect BSB’s action will have on other banks.
d. Why might it be difficult for BSB to take the action described in part (b)? Discuss another
way for BSB to return to its original reserve ratio.
4. You take $100 you had kept under your mattress and deposit it in your bank account. If
C
this $100 stays in the banking system as reserves and if banks hold reserves equal to 10
percent of deposits, by how much does the total amount of deposits in the banking system
increase? By how much does the money supply increase?

D 5. Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps
12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans.
a. Show the balance sheet of Happy Bank.
b. What is Happy Bank’s leverage ratio?
c. Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans
become worthless. Show the bank’s new balance sheet.
d. By what percentage do the bank’s total assets decline? By what percentage does the bank’s
capital decline? Which change is larger? Why?
6. The Federal Reserve conducts a $10 million open-market purchase of government bonds.
E
If the required reserve ratio is 10 percent, what is the largest possible increase in the money
supply that could result? Explain. What is the smallest possible increase? Explain.
8. Suppose that the T-account for First National Bank is as follows:
a. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess
reserves does First National now hold?
b. Assume that all other banks hold only the required amount of reserves. If First National
decides to reduce its reserves to only the required amount, by how much would the
economy’s money supply increase?
9. Suppose that the reserve requirement for checking deposits is 10 percent and that banks do
not hold any excess reserves.
a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s
reserves and money supply?
b. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to
hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the
overall change in the money multiplier and the money supply as a result of these actions?
10. Assume that the banking system has total reserves of $100 billion. Assume also that
required reserves are 10 percent of checking deposits and that banks hold no excess reserves
and households hold no currency.
a. What is the money multiplier? What is the money supply?
b. If the Fed now raises required reserves to 20 percent of deposits, what are the changes in
reserves and in the money supply?

F 11. Assume that the reserve requirement is 20 percent. Also assume that banks do not hold
excess reserves and there is no cash held by the public. The Federal Reserve decides that it
wants to expand the money supply by $40 million dollars.
a. If the Fed is using open-market operations, will it buy or sell bonds?
b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain
your reasoning.

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