Solutions to Problem Set 6 in Econ 353: Money, Banking and Financial Markets, Assignments of Economics

Download Solutions to Problem Set 6 in Econ 353: Money, Banking and Financial Markets and more Assignments Economics in PDF only on Docsity! Econ 353: Money, Banking and Financial Markets Problem Set 6 Solution 1. The monetary liabilities of the Federal Reserve include A) government securities and discount loans. B) currency in circulation and reserves. C) government securities and reserves. D) currency in circulation and discount loans. 2. The monetary base (high-powered money) minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans. 3. The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves. A) has no effect on; has no effect on B) has no effect on; increases C) increases; has no effect on D) decreases; increases 4. When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged 5. In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. 6. Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves 1 7. An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. A) multiplied; multiplied B) not multiplied; multiplied C) multiplied; not multiplied D) not multiplied; not multiplied 8. Everything else hed constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to _____ and the money supply to _____. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease 9. The money supply is _____ related to expected deposit outflows, and is _____ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively 10. If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is A) 2.54. B) 2.67. C) 2.35. D) 0.551. 11. Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process (what happens to bank B and C, refer to lecture notes), assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed? Answer: Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out this $81 2