Reading 24: Money, the Price Level, and Inflation-LOS e 习题精 2011, including, creation, deposits

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Session 6: Economics: Monetary and Fiscal Economics
Reading 24: Money, the Price Level, and Inflation

LOS e: Discuss the creation of money, including the role played by excess reserves, and calculate the amount of loans a bank can generate, given new deposits.

 

U.S. banks will generally opt to hold excess reserves if they believe general business conditions in the U.S. economy are subject to greater uncertainty. If all else is held constant, what is the most likely impact of this action?

A) The money supply will increase during a period of inflation, but will decrease if the economy goes into a recession.

B) The money supply will decrease.

C) There will be no effect on the money supply.

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If banks choose to hold excess reserves, they will decrease their lending. Less bank lending will cause the money supply to decrease.

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On January 5, the U.S. Federal Reserve (the Fed) bought $10,000,000 of U.S. Treasury securities in the open market. At the time, the reserve requirement was 25%, and all banks had zero excess reserves. What is the potential impact of the Fed's purchase on the U.S. money supply?

A) $10,000,000 increase.

B) $25,000,000 decrease.

C) $40,000,000 increase.

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Buying securities by the Fed increases the money supply because they are injecting money into the banking system. The money supply can potentially increase by 1 / 0.25 × $10,000,000 = $40,000,000.

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The amount of money a commercial bank has available to lend is known as:

A) required reserves.

B) excess reserves.

C) fractional reserves.

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Excess reserves are the amount of money a commercial bank has available with which to make new loans, after depositing its required reserves with the central bank.

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At a recent conference, Joe DiSanto and Michael Depasquale were discussing a recent Federal Reserve policy shift that led to an increase in banks’ excess reserves. They each offered an explanation as to why this would cause an increase in bank loans and investments:

DiSanto: “Banks are required by law to expand the number of loans they originate when the Fed creates excess reserves.”

Depasquale: “It is risky to hold excess reserves, whereas loans and investments are less risky.”

Are DiSanto and Depasquale’s statements CORRECT?

DiSanto

Depasquale

A) Incorrect Incorrect

B) Correct Incorrect

C) Incorrect Correct

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Both statements are incorrect. Banks are not required to expand their loans. If Fed policy increases banks’ excess reserves, the banks will want to expand their loans and investments because they generate more interest income than excess reserves deposited with the Fed. Loans and investments carry higher risk than assets held as reserves, but earn a greater return.

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On January 3, Logan Industries deposited $1,000,000 in cash at Federal Savings Bank. No excess reserves were present at the time Logan made the deposit and the required reserve ratio is 10%. What is the maximum amount by which Federal Savings Bank can increase its lending?

A) $100,000.

B) $10,000,000.

C) $900,000.

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Since there are no excess reserves present at the time that Logan deposited the money, the bank would be required to maintain $100,000 ($1,000,000 × 0.10) on reserve and would be able to loan out or increase the money supply by $900,000.

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When additional or excess reserves are injected into the U.S. banking system, the money supply can potentially increase by an amount equal to the additional excess reserves multiplied by which of the following?

A) Reciprocal of one minus the required reserve ratio.

B) Reciprocal of the required reserve ratio.

C) Actual deposit expansion multiplier.

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The potential deposit expansion multiplier = 1 / (required reserve ratio)

The potential increase in the money supply = potential deposit expansion multiplier × increase in excess reserves

luqian55

thanks a lot