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Chapter 15: Q.2 (page 410)

The First National Bank receives an extra $100 of reserves but decides not to lend out any of these reserves. How much deposit creation takes place for the entire banking system?

Short Answer

Expert verified

The bank receives an additional $100 of reserves but decides to not lend out any of the reserves. As there's no loan which is formed out of those reserves, no additional deposit are often created within the entire banking industry.

Step by step solution

01

Concept Introduction

The banking industry is that the group during which there are banks and financial institutions which offer the banking and financial services. The institutions during this system perform the works like providing loans and taking deposits.

02

Explanation of Solution

The deposit creation implies that the banks will collect amounts from the method of cash supply which is then employed in the method of lending. The reserves are those accounts within which amount is kept secured for further future use. If the bank receives some extra amount in reserves but doesn't lend that quantity to anyone, then no loan is formed for anybody. If no loan is formed, then deposits are not created.

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Most popular questions from this chapter

If you decide to hold \(100 less cash than usual and therefore deposit \)100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant?

The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the 2008-2010money supply decreased by 25% in the Depression period but increased by more than 20% during the recent financial crisis. What explains the difference in outcomes?

Go to the St. Louis Federal Reserve FRED database, and find the most current data available on Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ).

  1. Calculate the value of the currency deposit ratio c.
  2. Use RESBALNS and RESBALREQ to calculate the amount of excess reserves, and then calculate the value of the excess reserve ratio e. Be sure the units of total and required reserves are the same when you do the calculations.
  3. Assuming a required reserve ratio rr of 11%, calculate the value of the money multiplier m.

If a bank sells \(10 million of bonds to the Fed to pay back \)10million on the loan it owes, what is the effect on the level of checkable deposits?

Suppose the central bank of your country increases reserves by purchasing $1 million worth of bonds from banks and that the banking system in your economy is in equilibrium. What will happen to the level of checkable deposits? Use T-accounts to explain your answer.
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