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Problems from chapters 4 and 5 in the textbook




Question;Complete the following problems from chapters 4 and 5 in the textbook:1. A new bank has vault cash of $1 million and $5 million in depositsheld at its Federal Reserve District Bank.a. If the required reserves ratio is 8 percent, what dollar amountof deposits can the bank have?b. If the bank holds $65 million in deposits and currently holdsbank reserves such that excess reserves are zero, whatrequired reserves ratio is implied?2. Assume a bank has $5 million in deposits and $1 million in vaultcash. If the bank holds $1 million in excess reserves and the requiredreserves ratio is 8 percent, what level of deposits are being held?3. A bank has $110 million in deposits and holds $10 million in vaultcash.a. If the required reserves ratio is 10 percent, what dollaramount of reserves must be held at the Federal Reserve Bank?b. How would your answer in Part (a) change if the requiredreserves ratio was increased to 12 percent?4. Assume that Banc One receives a primary deposit of $1 million.The bank must keep reserves of 20 percent against its deposits.Prepare a simple balance sheet of assets and liabilities for Banc Oneimmediately after the deposit is received.5. The SIMPLEX financial system is characterized by a requiredreserves ratio of 11 percent, initial excess reserves are $1 million, andthere are no currency or other leakages.a. What would be the maximum amount of checkabledeposits after deposit expansion, and what would be themoney multiplier?b. How would your answer in (a) change if the reserve requirementhad been 9 percent?6. Challenge Problem ABBIX has a complex financial system withthe following relationships: The ratio of required reserves to totaldeposits is 15 percent, and the ratio of noncheckable deposits tocheckable deposits is 40 percent. In addition, currency held by thenonbank public amounts to 20 percent of checkable deposits. Theratio of government deposits to checkable deposits is 8 percent.Initial excess reserves are $900 million.a. Determine the M1 multiplier and the maximum dollar amountof checkable deposits.b. Determine the size of the M1 money supply.c. What will happen to ABBIX?s money multiplier if the reserverequirement decreases to 10 percent while the ratio ofnoncheckable deposits to checkable deposits falls to 30 percent?Assume the other ratios remain as originally stated.d. Based on the information in (c), estimate the maximumdollar amount of checkable deposits, as well as the size of theM1 money supply.e. Assume that ABBIX has a target M1 money supply of$2.8 billion. The only variable that you have direct controlover is the required reserves ratio. What would the requiredreserves ratio have to be to reach the target M1 money supplyamount? Assume the other original ratio relationships hold.f. Now assume that currency held by the nonbank public dropsto 15 percent of checkable deposits and that ABBIX?s targetmoney supply is changed to $3.0 billion. What would therequired reserves ratio have to be to reach the new target M1money supply amount? Assume the other original ratio relationshipshold.


Paper#57969 | Written in 18-Jul-2015

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