DISCUSSION QUESTIONS -

1. List and describe briefly the economic policy objectives of the nation.

2. Describe the relationship among policy makers, types of policies, and policy objectives.

3. Describe how the U.S. government responded to the perfect financial storm.

4. Describe the effects of tax policy on monetary and credit condition.

5. Federal government deficit financing may have a great influence on monetary and credit conditions. Explain.

6. Discuss the various objectives of debt management.

7. Explain how Federal Reserve notes arc supported or backed in our financial system.

8. Why are the expansion and contraction of deposits by the banking system possible in our financial system?

9. Trace the effect on its accounts of a loan made by a bank that has excess reserves available from new deposits.

10. Explain how deposit expansion takes place in a banking system consisting of two banks.

11. Explain the potential for deposit expansion when required reserves average 10 percent and $2,000 in excess reserves are deposited in the banking system.

12. Trace the effect on bank reserves of a change in the amount of cash held by the public.

13. Describe the effect on bank reserves when the Federal Reserve sells U.S. government securities to a bank.

14. Summarize the factors that can lead to a change in bank reserves.

15. What is the difference between the monetary base and total bank reserves?

16. Briefly describe what is meant by the money multiplier (m) and indicate the factors that affect its magnitude or size.

17. Define the velocity of money (NW), and explain why it is important to anticipate changes in money velocity.

18. Why does it seem to be important to regulate and control the supply of money?

PROBLEMS -

1. 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 One immediately after the deposit is received.

2. Assume that Bank A receives a primary deposit of 5100,000 and that it must keep reserves of 10 percent against deposits.

a. Prepare a simple balance sheet of assets and liabilities for the bank immediately alter the deposit is received.

b. Assume Bank A makes a loan in the amount that can be safely lent. Show what the bank's balance sheet of assets and liabilities would look like immediately after the loan.

c. Assume that a check in the amount of the derivative deposit created in (b) was written and sent to another bank. Show what Bank A's (the lending bank's) balance sheet of assets and liabilities would look like after the check is written.

3. Rework Problem 2 assuming Bank A has reserve requirements that are 15 percent of deposits.

4. Assume two banks, A and Z, exist in the banking system. Bank A receives a primary deposit of $600,000, and it must keep reserves of 12 percent against deposits. Bank A makes a loan in the amount that can be safely lent.

a. Show what Bank A's balance sheet of assets and liabilities would look like immediately after the loan.

b. Assume that a check is drawn against the primary deposit made in Bank A and is deposited in Bank L Show what the balance sheet of assets and liabilities would look like for each of the two banks after the transaction has taken place.

c. Assume that Bank Z makes a loan in the amount that can be safely lent against the funds deposited in its bank from the transaction described in (b). Show what Bank Z's balance sheet of assets and liabilities would look like after the loan.

5. The SIMPLEX financial system is characterized by a required reserves ratio of 11 percent; initial excess reserves are SI million, and there are no currency or other leakages.

a. What would be the maximum amount of checkable deposits after deposit expansion, and what would be the money multiplier?

b. Flow would your answer in (a) change if the reserve requirement had been 9 percent?

6. Assume a financial system has a monetary base (MB) of $25 million. The required reserves ratio is 10 percent, and no leakages are in the system.

a. What is the size of the money multiplier (m)?

b. What will be the system's money supply?

7. Rework Problem 6 assuming the reserve ratio is 14 percent?

8. The BASIC financial system has a required reserves ratio of 15 percent; initial excess reserves are $5 million, cash held by the public is SI million and is expected to stay at that level, and no other leakages or adjustments are in the system.

a. What would be the money multiplier and the maximum amount of checkable deposits?

b. What would be the money supply amount in this system after deposit expansion?

9. Rework Problem 8, assuming that the cash held by the public drops to $500,000 with an equal amount becoming excess reserves and the required reserves ratio drops to 12 percent.

10. The COMPLEX financial system has these relationships: The ratio of reserves to total deposits is 12 percent, and the ratio of non-checkable deposits to checkable deposits is 40 percent. In addition, currency held by the nonbank public amounts to 15 percent of checkable deposits. The ratio of government deposits to checkable deposits is 8 percent, and the monetary base is $300 million.

a. Determine the size of the M I money multiplier and the size of the money supply.

b. If the ratio of currency in circulation to checkable deposits were to drop to 13 percent while the other ratios remained the same, what would be the impact on the money supply?

c. If the ratio of government deposits to checkable deposits increases to 10 percent while the other ratios remained the same, what would be the impact on the money supply?

d. What would happen to the money supply if the reserve requirement increased to 14 percent while non-checkable deposits to checkable deposits fell to 35 percent? Assume the other ratios remain as originally stated.

11. Challenge Problem ABBIX has a complex financial system with the following relationships: The ratio of required reserves to total deposits is 15 percent, and the ratio of non-checkable deposits to checkable deposits is 40 percent. In addition, currency held by the nonbank public amounts to 20 percent of checkable deposits. The ratio of government deposits to checkable deposits is 8 percent. Initial excess reserves are $900 million.

a. Determine the M1 multiplier and the maximum dollar amount of checkable deposits.

b. Determine the size of the M1 money supply.

c. What will happen to ABBIX's money multiplier value if the reserve requirement decreases to 10 percent while the ratio of non-checkable 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 maximum dollar amount of checkable deposits, as well as the size of the M1 money supply.

e. Assume that ABBIX has a target M1 money supply of 52.8 billion. The only variable you have direct control over is the required reserves ratio. What would the required reserves ratio have to be to reach the target M1 money supply amount? Assume the other original ratio relationships hold.

f. Now assume that currency held by the nonbank public drops to 15 percent of checkable deposits and that ABBIX's target money supply is changed to 53.0 billion. What would the required reserves ratio have to be to reach the new target M1 money supply amount? Assume the other original ratio relationships hold.