Chap 26

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$MATH 219 - Differential Equations Quiz 3 Name Solutions Date ...$

236 CHAPTER 10 Answers to the Problems 1. Of the list, money in the United States includes the quarters inside public telephones and the U.S. dollar bills in your wallet. Money is composed of currency outside the banks and deposits at financial institutions. Currency inside the cash machines, Visa cards, checks, and loans are not money. 2. Of the list, money in the United States includes the checking deposits at Citicorp, the Susan B. Anthony dollar coin, and NOW accounts. The checking deposits at Citicorp and the NOW accounts are deposit money. The three money assets meet all the functions of money. IBM stock and U.S. government securities are not money. While IBM stock and U.S. Treasury securities are stores of value, they are definitely not a mediums of exchange and so are not money. 3. M1 increases by $1,000; M2 does not change. M1 is the sum of currency outside the banks, traveler’s checks, and checking deposits. M2 is the sum of M1 plus savings deposits, time deposits, and money market mutual funds and other deposits. The withdrawal of $1,000 from a savings account leaves M2 unchanged because the $1,000 goes into M1 types of money, which is part of M2. The $50 held as cash and the $950 held in a checking account increase M1 by $1,000. 4. M1 does not change; M2 does not change. M1 is the sum of currency outside the banks, traveler’s checks, and checking deposits. The $10,000 when it was kept in the savings account was not part of M1 and when it is put into a money market fund it still is not part of M1. So M1 does not change. M2 is the sum of M1 plus savings deposits, time deposits, and money market mutual funds and other deposits. When kept in the savings account, the $10,000 was part of M2. And, when put in the money market mutual fund, the $10,000 remains part of M2. So M2 does not change. 5 a. The balance sheet has the following assets: Reserves, $250 million; Loans, $1,000 million; Other assets, $1,250 million. It has the following liabilities: Deposits, $2,000 million; Other liabilities, $500 million. Assets Liabilities Reserves $250 million Deposits $2,000 million Loans 1,000 million Other liabilities 500 million Other assets 1,250 million Total assets 2,500 million Total liabilities 2,500 million b. The reserve ratio is 12.5 percent. The reserve ratio is the percentage of deposits that are held as reserves. Reserves are $250 million and deposits are $2,000, so the reserve ratio is 12.5 percent. c. The deposit multiplier is 8. The deposit multiplier equals 1/(required reserve ratio). The required reserve ratio is 12.5 percent, so the deposit multiplier is 8.
MONEY, BANKS, AND THE FEDERAL RESERVE 237 6. a. The balance sheet has the following assets: Reserves, $125 million; Loans, $1,875 million; Other assets, $100 million. It has the following liabilities: Deposits, $2,000 million; Other liabilities, $100 million. Assets Liabilities Reserves $125 million Deposits $2,000 million Loans 1,875 million Other liabilities 100 million Other assets 100 million Total assets 2,100 million Total liabilities 2,100 million b. The reserve ratio is 6.25 percent. The reserve ratio is the percentage of deposits that are held as reserves. Reserves are $125 million and deposits are $2,000, so the reserve ratio is 6.25 percent. c. The deposit multiplier is 16. The deposit multiplier equals 1/(required reserve ratio). The required reserve ratio is 6.25 percent, so the deposit multiplier is 16. 7. a. The initial increase in the quantity of money is $1,200. Money is equal to bank deposits and currency outside the banks. Deposits increase by $1,200, so the initial increase in the quantity of money is $1,200. b. The initial increase in the quantity of bank deposits is $1,200. Deposits increase by $1,200 because the immigrant places all the new money on deposit. c. The bank initially lends out $1,080. The bank has a new deposit of $1,200, and it must keep 10 percent of it ($120) as reserves and lends the rest ($1,200 minus $120), which equals $1,080. d. The immigrant’s bank has loaned $1,080. This amount returns to the banks as new deposits. The banks keep $108 in reserves and lend a further $972. The banks have now created deposits of $1,200 plus $1,080, which equals $2,280. e. The quantity of money has increased by $9,341.05. The first loan is $1,080, and the quantity of money increases by $1,080. When this money is spent and returned to the bank as a deposit, the banks keep 10 percent of it ($108) as reserves and lend out the rest ($972). The banks create $972 of new money. So, after 2 loans, the quantity of money has increased by $1,200 + $1,080 + $972, which equals $3,252. Similar calculations reveal that after 20 loans the quantity of money increases by $9,341.05. f. The quantity of money increases by $12,000. Deposits increase by $12,000. Loans increase by $10,800. The deposit multiplier is 1/0.1, which equals 10. The deposit multiplier tells us that when reserves increase by $1,200 and the required reserve ratio is 10 percent, deposits will increase by 10 times $1,200, which is $12,000. T The quantity of money increases by the amount of the increase in deposits. Deposits increase by $12,000 and the reserve ratio is 10 percent, so reserves increase $1,200. Therefore bank loans increase by $12,000 minus $1,200, which is $10,800. 8. a. The initial increase in the quantity of money in the United States is $100,000. Money is equal to bank deposits and currency outside the banks. Deposits increase by $100,000 so the initial increase in the quantity of money is $100,000. b. The initial increase in the quantity of bank deposits is $100,000. Deposits increase by $100,000 because the (trusting!) thief places all the new money on deposit.
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Chap 26

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