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Classify each of these transactions as an asset, a liability, or neither for each of the
"players" in the money supply process - the Federal Reserve, banks, and depositors.
a. You get a $10,000 loan from the bank to buy an automobile.
b. You deposit $400 into your checking account at the local bank.
c. The Fed provides an emergency loan to a bank for $1,000,000
d. A bank borrows $500,000 in overnight loans from another bank
e. You use your debit card to purchase a meal at a restaurant for $100.
a. Liability to you (depositor) because you now owe the bank $10,000, asset to the bank
because you owe them principal and interest, neither to Fed Res, bc they play no part
b. Asset to you (depositor), liability to bank bc they owe you $400, neither to Fed Res,
bc they play no part
c. Fed holds an asset to this plus interest, liability to the bank because it owes this much
to Fed, neither to depositors bc they play no part
d. bank that borrows has liability, bank that extended loan holds it as an asset, neither
for Fed
e. neither to depositor, liability for bank, neither to Fed
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?
$0
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Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First
National Bank and all other banks use the resulting increase in reserves to purchase
securities only and not to make loans, what will happen to checkable deposits? Assume
the required reserve ratio is 10 percent.
Change of D = 1 / rr x Change of R

Checkable deposits increase by $10 million.

If a bank depositor withdraws $1,00 of currency from an account, what happens to
reserves, checkable deposits, and the monetary base? Assume that the required
reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves.
Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base
remains uncharged.
If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it
owes, what is the effect on the level of checkable deposits?
checkable deposits do not change
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 holding of currency constant?
checkable deposits increase by $1,000
"The Fed can perfectly control the amount of reserves in the system" Is this statement
true, false or uncertain?
False. A shift from deposits to currency will affect the amount of reserves, and since
other players are involved in this process, the Fed ultimately cannot control the level of
reserves in the system
"The Fed can perfectly control the amount of the monetary base, but has less control
over the compositions of the monetary base" Is this true, false or uncertain?
False, since the Fed cannot control the amount of discount lending to financial
institutions, it does not have perfect control over the amount of reserves in the banking
system and hence the monetary base
The Fed buys $100 million of bonds from the public and also lowers the reserve
requirement r. What will happen to the money supply?
the money supply will increase
Describe how each of the following can affect the money supply: (a) the central bank,
(b) banks, and (c) depositors
a) central bank: supplies money, changes the non borrowed money base.
b) banks: money supply will increase because of less excess reserves and more loans
c) depositors: a lower money supply for a given monetary base because of the lower
money multiplier.
The money multiplier is necessarily greater than 1. true or flase?
true, because in reality, the required and excess reserve ratios typically add up to less
than one
What effect might a financial panic have on the money multiplier and the money supply?
Why?
In a financial panic, you would expect the money multiplier to decrease and the money
supply to decrease, which would cause the excess reserves ratio to increase. Thus
depositors are likely to increase their holdings of currency.
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During the Great Depression years from 1930-1933 both the currency ratio c and the
excess reserves ration c rose dramatically. What effect did these factors have on the
money multiplier?
An increase in both the currency ratio and the excess reserves ratio resulted in a
dramatic decrease of the money multiplier.
In October 2008, the Federal Reserve began paying interest on the amount of excess
reserves held by banks. How, if at all, might this affect the multiplier process and the
money supply?
Paying interest on reserves gives banks incentive to hold more reserves rather than
lend them out, which should raise the excess reserve ratio, reduce the money multiplier,
and reduce the money supply, holding the monetary base constant.
the money multiplier declined significantly during the period 1930-1933 and also during
the recent financial crisis of 2008-2010. yet the m1 money 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?
During the Great Depression, the Federal Reserve did not expand the monetary base
so the decline in the money multiplier resulted in a decrease in the money supply.
During the most recent crisis when the money multiplier decline because of the increase
in excess reserves, the Federal Reserve increased the monetary base to keep the
money supply stable.
If the Fed sells $2 million of bonds to the First National Bank, what happens to reserves
and the monetary base?
Reserves and the monetary base fall by $2 million,
If the fed sells $2 million of bonds to Irving the investor , who pays for the bonds with a
briefcase filled with currency, what happens to the monetary base?
Reserves are unchanged, but the monetary base decreases by $2 million due to the
currency
reduction
If the Fed lends five banks a total of $100 million but depositors withdraw $50 million
and hold it as currency, what happens to reserves and the monetary base?
Reserves increase by $50 million, and the monetary base increases by $100 million.
What happens to checkable deposits in the banking system when the Fed lends an
additional $1 million to the First National Bank, assuming that the required reserve ratio
on checkable deposits is 10%, banks do not hold any excess reserves, and the public's
holdings of currency do not change?
Checkable deposits rise by $10 million.
What happens to checkable deposits in the banking system when the Fed sells $2
million of bonds to the First National Bank?
checkable deposits decline by $20 million.
If the Fed buys $1 million of bonds from the First National Banks, but an additional 10%
of any deposit is held as excess reserves, what is the total increase in checkable
deposits?
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