Bunting: Money Supply Process
1. If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base?
2. You find a $100 note and deposit it in your bank account. How will this affect the money supply?
3. The Fed buys $300 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply? Why?
4. Describe how each of the following can affect the money supply: (a) the central bank; (b) banks; and (c) depositors.
5. When the Fed sells $4 million of bonds to Eagle Bank what happens to reserves and the monetary base? Use T-accounts to explain your answer.
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Eagle Bank
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Liabilities
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Federal Reserve System
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6. The Fed sells $2 million of bonds to an investor, who pays with currency. What happens to reserves and the monetary base? Use T-accounts to explain your answer.
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Investor
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Federal Reserve System
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7. If the Fed lends banks a total of $100 million. What happens to reserves and the monetary base? Use T-accounts to explain your answer.
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Banking System
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Liabilities
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Federal Reserve System
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8. From question 7, the public withdraws $50 million in deposits to hold as currency. What happens to the banking system, Fed and Public T-accounts?
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Banking System
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Assets
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Liabilities
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Federal Reserve System
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Public
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9. Suppose that currency in circulation is $100 billion, the amount of checkable deposits is $900 billion, and excess reserves are $180 billion and the required reserve ratio is 10%. Calculate the money supply, monetary base, the currency deposit ratio, the excess reserve ratio, and the money multiplier
10. Suppose depositors lose confidence in the banking system and withdraw $800 billion. How will values found in question 1 change?
11. Suppose depositors regain confidence in the banking system and deposit $800 billion but now business lose confidence and excess reserves increase to $360 billion. How will values found in question 1 change?
12. Find the money multiplier when currency in circulation is $600 billion, checkable deposits are $900 billion, excess reserves are $15 billion and the required reserve ratio is 10%.How will reduction in the required reserve ratio to 5% affect the money multiplier?