# Problems from chapters 4 and 5 in the textbook

Question # 00003990 Posted By: mac123 Updated on: 11/23/2013 11:05 PM Due on: 11/27/2013
Subject Economics Topic General Economics Tutorials:
Question
Complete the following problems from chapters 4 and 5 in the textbook:

1. A new bank has vault cash of \$1 million and \$5 million in deposits
held at its Federal Reserve District Bank.
a. If the required reserves ratio is 8 percent, what dollar amount
of deposits can the bank have?
b. If the bank holds \$65 million in deposits and currently holds
bank reserves such that excess reserves are zero, what
required reserves ratio is implied?

2. Assume a bank has \$5 million in deposits and \$1 million in vault
cash. If the bank holds \$1 million in excess reserves and the required
reserves ratio is 8 percent, what level of deposits are being held?

3. A bank has \$110 million in deposits and holds \$10 million in vault
cash.
a. If the required reserves ratio is 10 percent, what dollar
amount of reserves must be held at the Federal Reserve Bank?
b. How would your answer in Part (a) change if the required
reserves ratio was increased to 12 percent?

4. Assume that Banc One receives a primary deposit of \$1 million.
The bank must keep reserves of 20 percent against its deposits.
Prepare a simple balance sheet of assets and liabilities for Banc One
immediately after the deposit is received.

5. The SIMPLEX financial system is characterized by a required
reserves ratio of 11 percent; initial excess reserves are \$1 million, and
there are no currency or other leakages.
a. What would be the maximum amount of checkable
deposits after deposit expansion, and what would be the
money multiplier?
b. How would your answer in (a) change if the reserve requirement

6. Challenge Problem ABBIX has a complex financial system with
the following relationships: The ratio of required reserves to total
deposits is 15 percent, and the ratio of noncheckable deposits to
checkable deposits is 40 percent. In addition, currency held by the
nonbank public amounts to 20 percent of checkable deposits. The
ratio of government deposits to checkable deposits is 8 percent.
Initial excess reserves are \$900 million.
a. Determine the M1 multiplier and the maximum dollar amount
of checkable deposits.
b. Determine the size of the M1 money supply.
c. What will happen to ABBIX’s money multiplier if the reserve
requirement decreases to 10 percent while the ratio of
noncheckable deposits to checkable deposits falls to 30 percent?
Assume the other ratios remain as originally stated.
d. Based on the information in (c), estimate the maximum
dollar amount of checkable deposits, as well as the size of the
M1 money supply.
e. Assume that ABBIX has a target M1 money supply of
\$2.8 billion. The only variable that you have direct control
over is the required reserves ratio. What would the required
reserves ratio have to be to reach the target M1 money supply
amount? Assume the other original ratio relationships hold.
f. Now assume that currency held by the nonbank public drops
to 15 percent of checkable deposits and that ABBIX’s target
money supply is changed to \$3.0 billion. What would the
required reserves ratio have to be to reach the new target M1
money supply amount? Assume the other original ratio relationships
hold.
Tutorials for this Question
1. ## Solution: Problems from chapters 4 and 5 in the textbook

Tutorial # 00003773 Posted By: mac123 Posted on: 11/24/2013 12:01 AM
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