Learning Materials
Features
Discover
Chapter 15: Q6. (page 318)
鈥淲hen a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.鈥� Explain.
The loans increase the checkable deposits and create money, whereas paying off the loans reverses the cycle and destroys the money.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
Suppose that Serendipity Bank has excess reserves of \(8,000 and checkable deposits of \)150,000. If the reserve ratio is 20 percent, how much does the bank hold in actual reserves?
鈥淲henever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced鈥�. Do you agree? Explain why or why not.
How would a decrease in the reserve requirement affect the (a) size of the monetary multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?
The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent.
| Assets | Liabilities and Net worth | ||||||
| \( | (1) | (2) | \) | (1') | (2') | ||
| Reserves Securities Loans | 22,000 38,000 40,000 | Checkable deposits | 1,00,000 | ||||
a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1鈥� how the bank鈥檚 balance sheet will appear after the bank has loaned this additional amount.
b. By how much has the money supply changed?
c. How will the bank鈥檚 balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2鈥�.
d. Answer questions a, b, and c again, on the assumption that the reserve ratio is 15 percent.
Suppose again that Third National Bank has reserves of \(20,000 and checkable deposits of \)100,000. The reserve ratio is 20 percent. The bank now sells \(5,000 in securities to the Federal Reserve Bank in its district, receiving a \)5,000 increase in reserves in return. What amount of excess reserves does the bank now have? By what amount does your answer differ (yes, it does!) from the answer to problem 3?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine