/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q7. Suppose that the Fed has set the... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 15: Q7. (page 319)

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have \(2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

  1. \)0

  2. \(200 million

  3. \)2 billion

  4. $20 billion

Short Answer

Expert verified

Option (d) $20 billion

Step by step solution

01

Meaning of new checkable-deposit money

The new checkable-deposit money is the increase in money supply by the circulation of excess reserves. The excess reserve creates the new checkable-deposit money by the rate of a monetary multiplier.

New Checkable-Deposit Money=ExcessReserve x Monetary Multiplier

D = E x m

The monetary multiplier is expressed as the inverse of the required reserve ratio.

MonetaryMultiplier=1RequiredReserveRatiom=1R

02

Calculations for the answer

Given that R = 0.1 ( or 10%), the monetary multiplier is:

m=10.1=10

Since excess reserves are $2 billion, the new checkable-deposit money is:

D = $ 2 billion x 10

= $ 20 billion

Hence, the answer is $20 billion.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Third National Bank has reserves of \(20,000 and checkable deposits of \)100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

Suppose the following simplified consolidated balance sheet is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent.

a. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? Show in columns 1 and 1鈥� how the consolidated balance sheet would look after this amount has been loaned. What is the value of the monetary multiplier?

b. Answer the questions in part a assuming the reserve ratio is 20 percent. What is the resulting difference in the amount that the commercial banking system can loan?

Explain why a single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?

Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?

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?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.