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Chapter 16: Q4. (page 347)

A bank currently has \(100,000 in checkable deposits and \)15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ______ in money-creating potential. If the reserve ratio is 14 percent, the bank has _______ in money-creating potential

a. \(20,000; \)14,000

b. \(3,000; \)2,100

c. −\(5,000; \)1,000

d. \(5,000; \)1,000

Short Answer

Expert verified

The correct option, in this case, will be ‘c. -$5,000,$1000’.

Step by step solution

01

Step 1. Explanation for the correct answer

The money-creating potential of banks is equal to the difference between the actual reserves andthe required reserves. If the reserve ratio is 20 percent, the required reserve will be 20 percent of the checkable deposit, i.e., 20% of $100,000, which is $20000. The actual reserve is $15,000, which means that the money-creating potential is -$5,000.

If the reserve ratio is 14 percent, the required reserve will be 14% of $100,000, which is $14,000. The actual reserve is $15,000, which means that the money-creating potential is $1,000.

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The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.

a. just

b. twice

c. half

d. ten times

In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate? Would you be surprised to learn that the Fed’s targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?

In the tables that follow, you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets will read after each transaction a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars.


\(

Consolidated Balance Sheet:

All commercial banks

1

2

3

Assets


Reserve

Securities

Loans




33

60

60





150

3














Liabilities and net worth:



Checkable deposits

Loans from federal reserve banks


\)

Consolidated Balance Sheet:

The 12 Federal Reserve Banks

1

2

3

Assets


Securities

Loans to commercial banks




60

03





33













Liabilities and net worth:



Reserves of commercial bank


Treasury deposits

Federal reserve notes

3

27






a. A decline in the discount rate prompts commercial banks to borrow an additional \(1 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.

b. The Federal Reserve Banks sell \)3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet numbers in column 2 of each table.

c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet numbers in column 3 of each table.

d. Now review each of the previous three transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reserves took place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction?

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