Suppose the required reserve ratio is 5 percent. If I make a $1000 deposit into the...

Suppose the required reserve ratio is 5 percent. If I make a $1000 deposit into the bank, economic activity will increase by

	$5,500 of new money.
	$5,000 of new money.
	$4,000 of new money.
	None of the above is correct.

2. Suppose the required reserve ratio is 12.5%. If you make a $500 deposit into the bank, how much can that bank immediately loan out?

	$500
	$437.50
	$62.50.
	8

If banks were required to keep 100% of deposits as cash reserves (that is, the rrr is 100%), which of the following would correctly complete this sentence? The banking multiple is

	0 and banks create money.
	0 and banks do not create money.
	1 and banks create money
	1 and banks do not create money.

Solutions

Expert Solution

Change in Money supply = Money Multiplier × Change in Monetary Base

Money Multiplier = 1/Required Reserve Ratio

Money Multiplier = 1/0.05

Money Multiplier = 20

Now the monetary base includes currency held by the public and total deposits. Since, the deposit has been made out of the cash held by the public so there will be no change in the economic activity. So, the correct option is “None of the above is correct”.

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

1) Suppose a bank receives a $1000 deposit. The required reserve ratio is 10%. The bank...

1) Suppose a bank receives a $1000 deposit. The required reserve ratio is 10%. The bank makes an $850 loan and holds $150 in reserves. d. Demonstrate what happens in the market for Federal Funds graphically. Show how the federal funds rate and the quantity of federal funds changes. [10pts]

Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currencydeposit...

Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currencydeposit ratio is 20 percent. a. If the Central Bank decreases the monetary base by $400 through open market operations, what will be the decrease in the money supply? b. If the Central Bank increases the discount rate and firms react by increasing the reservedeposit ratio to 20 percent, what is the change in the multiplier? Will this change increase or decrease the money supply?...

Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currency...

Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currency deposit ratio is 20 percent. a. If the Central Bank increases the monetary base by $400 million through open market operations, what will be the increase in the money supply? b. If the Central Bank decreases the discount rate and firms react by decreasing the reserve deposit ratio to 5 percent, what is the change in the multiplier? Will this change increase or decrease...

Assume that the currency-deposit ratio is 0.5, the required reserve ratio is 0.1, and the excess...

Assume that the currency-deposit ratio is 0.5, the required reserve ratio is 0.1, and the excess reserves to deposit ratio is 0.15. If the monetary base is $2 trillion, find (a) the amount of currency in circulation in billions of dollars; (b) required reserves in billions of dollars; and (c) excess reserves in billions of dollars. (d) simple deposit multiplier which ignores leakages. The amount of currency in circulation in billions of dollars: Required reserves in billions of dollars: Excess...

Suppose that a bank has a required reserve ratio (target reserve ratio) of 10%, reserves of...

Suppose that a bank has a required reserve ratio (target reserve ratio) of 10%, reserves of $2.2 billion, loans of $17.8 billion, deposits of $20 billion, and no other liabilities or assets. a. (4 points) What is the amount of loans at equilibrium? b. (4 points) Suppose that the Bank of Canada’s currency issue (legal tender) is $52 billion, private bank deposits at the Bank of Canada are $2 billion, currency in circulation is $36 billion, and the target reserve...

In 2007 before the financial crisis, the currency to deposit ratio 1.2, required reserve ratio plus...

In 2007 before the financial crisis, the currency to deposit ratio 1.2, required reserve ratio plus excess reserve ratio is 0.05. the total money supply measured by M1 in 2007 was 1.4 trillion dollar. (1) Calculate the value of the money multiplier and the value of the money base? (2) During the financial crisis, the U.S. central bank purchase a large amount of assets, including long term government bonds and mortgate based securities, to provide liquidity to the market and...

Suppose the Federal Reserve System has a required reserve ratio of 10% and there are no...

Suppose the Federal Reserve System has a required reserve ratio of 10% and there are no excess reserves in the system. Explain the impact of the following action: The Federal Open Market Committee conducts an open market purchase of $25 million of U.S. securities from the commercial banking system. Identify the impact on both the Money Supply and on Aggregate Demand. Be specific.

1. If the required reserve ratio is 10%, how much a new $10,000 deposit can a...

1. If the required reserve ratio is 10%, how much a new $10,000 deposit can a bank lend? What is the potential impact on the money supply? 2. A bank currently holds $150,000 in excess reserves. If the current reserve requirement is 12.5%, how much could the money supply change? How could this happen? 3. The trading desk at the Federal Reserve sold $100,000,000 in T-bills to the public. If the current reserve requirement is 8.0%, how much could the...

In August of 2015, the Chinese central bank decided to reduce that nation's required reserve-deposit ratio...

In August of 2015, the Chinese central bank decided to reduce that nation's required reserve-deposit ratio from 18.5 percent to 18 percent. Assuming no change in the amount of cash held by the Chinese public, that commercial banks lend all their excess reserves, and that bank reserves was a constant 4,329 billion yuan both before and after the change. a. The value of Chinese banks deposits was billion yuan before this change in the reserve-deposit ratio and billion yuan after...

(5) Currently, the required reserve ratio for banks is 0%. Please explain what required reserves are,...

(5) Currently, the required reserve ratio for banks is 0%. Please explain what required reserves are, what a 0% required reserve ratio means and why the Federal Reserve may want to set a 0% required reserve ratio right now. If the required reserve ratio returns to 10% after the coronavirus crisis, then what would we expect to be the increase in commercial bank deposits following a one-dollar open market purchase? Show all work.

Subjects