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Chapter 15: Q.4 (page 410)

If a bank depositor withdraws$1000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base?

Short Answer

Expert verified

The monetary base will be unchanged.

Step by step solution

01

Concept Introduction

The monetary base (or M0) is the aggregate sum of cash that is either widely accepted in the possession of the general population or as business bank stores held in the national bank's stores.

02

Explanation

Total reserves and checking deposits will both reduce by $1,000 while money outside of banks will increment by $1,000. Since money outside of banks ascends by the very sum that concluded reserves decline, the financial base will be unaltered.

03

Final Answer

Total reserves and checking deposits will both decrease by $1000. The monetary base will be unchanged.

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Most popular questions from this chapter

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?

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends $1million to the First National Bank.

"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base.鈥� Is this statement true, false, or uncertain? Explain.

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.
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