ECN-220 Module 6 Chapter 14 Problems

ECN-220 Module 6 Chapter 14 Problems: The Federal Reserve System Solutions

Introduction to Economics – Money and Banks

Grand Canyon University

Complete problems 3, 6, and 11 in the textbook.

Textbook: The Economy Today (13th Edition)

Problems

3. Assume that the following data describe the condition of the banking system:

Total reserves $200 billion

Transactions deposits $800 billion

Cash held by public $400 billion

Reserve requirement 0.20

(a) How large is the money supply (M1)?

(b) How large are required reserves?

(c) How large are excess reserves?

(d) By how much could the banks increase their lending activity?

6. Assume the banking system contains the following amounts:

Total reserves $80 billion

Transactions deposits $800 billion

Cash held by public $100 billion

Reserve requirement 0.10

(a) Are the banks fully utilizing their lending capacity?

(b) What would happen to the money supply initially if the public deposited another $30 billion of cash in transactions accounts?

(c) What would the lending capacity of the banking system be after such a portfolio switch?

(d) How large would the money supply be if the banks fully utilized their lending capacity?

(e) What three steps could the Fed take to offset that potential growth in M1?

11. Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves.

Assets (in Billions) Liabilities (in Billions) T

otal reserves $ 30 Transactions accounts $400

Securities $190

Loans $180

Total $400 Total $400

(a) What is the reserve requirement?

(b) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.

(c) By how much has the money supply changed as a result of the lower reserve requirement (step b)?

(d) Suppose the Fed now buys $10 billion of securities directly from the banks. What will the banks’ books look like after this purchase?

(e) How much excess reserves do the banks have now?

(f) By how much can the money supply now increase?