T-Account Notable Scenarios Bank makes new loans. Customer deposits cash into checking. Fed buys bonds from bank (bank’s t-account). Open market purchases (Fed’s t-account). Open market sales (Fed’s t-account).

M25 Money Multiplier

Review excess reserves formula

Banks create money by lending money. (simulation)

When a bank’s reserves increase, the money supply in an economy will increase by a multiple of the increase in reserves.

Assumptions No Leakages Banks Hold No Excess Reserves Securities: Same as Bonds

The Money Multiplier Formula:

1/reserve requirement aka reciprocal of the reserve ratio

The Money Multiplier Formula: If reserve ratio is 0.2, banks must hold ___% of all deposits in reserve. The money multiplier is 1/0.2 which is?

How money enters/exits the system.

Example Fed buys $2 billion in securities. Reserve ratio = 0.1 Assuming no leakages and no excess reserves, the money supply will increase by:

Example Fed sells $5 billion in securities. Reserve ratio = 0.25 Assuming no leakages and no excess reserves, the money supply will ___________ by:

Clean Sheet of Paper

1) Finish this sentence: Suppose the Federal Reserve buys $300,000 worth of government securities to securities dealers on the open market. Suppose that banks hold no excess reserves and the reserve requirement on deposits is 25%. As a result the money supply will

2) Finish this sentence: Assuming a 20% reserve ratio, a $200 sale of government bonds by the Fed to individuals will result in a total demand deposit contraction for the banking system equal to

3) Finish this sentence: If the required reserve ratio is 15% and commercial bankers decide to hold additional excess reserves equal to 5% of any newly acquired demand deposits, then the effective monetary multiplier for the banking system will be:

4) Finish this sentence: Assuming a 20% reserve ratio and a desire on the part of all banks to keep 5% in excess reserves for liquidity, a $200 sale of government bonds by the Fed to individuals will result in a total demand deposit contraction for the banking system equal to

5) Finish this sentence: Assuming that the Federal Reserve Banks buy $45 billion in government securities to commercial banks and the reserve ratio is 10%, then the effect will be to

6) Finish this sentence: Suppose a commercial banking system has $240,000 of outstanding demand deposits. If the reserve ratio is 25 percent, this bank’s required reserves equal ____________.

7) Finish this sentence: Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, this bank’s excess reserves = ___________.

8) Finish this sentence: Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, this bank’s excess reserves = ___________.

9) Finish this sentence: Assume the commercial banking system has demand deposits of $20 billion and excess reserves of $4 billion at a time when the reserve ratio is 25 percent. If the reserve ratio is lowered to 20 percent, maximum money- creating potential of the banking system has increased by

New Money From Fed vs Old Money Back In the System

Deposits = $1,000 Bank reserves = $100 Reserve ratio = 0.1 (10%) Then the Fed buys $10 worth of securities. Excess reserves: Money multiplier: Amount of new loans: Change in money supply:

New Money From Fed vs Old Money Back In the System Deposits = $1,000 Bank reserves = $100 Reserve ratio = 0.1 (10%) Then Joe deposits $10 he found under his couch. Excess reserves: Money multiplier: Amount of new loans: Change in money supply:

New Money From Fed vs Old Money Back In the System Deposits = $1,000 Bank reserves = $110 Reserve ratio = 0.1 (10%) Excess reserves: Money multiplier: Amount of new loans: Change in money supply:

10) Finish this sentence: Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can lend a maximum of:

11) Finish this sentence: Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of:

12) Finish this sentence: The commercial banking system has excess reserves of $500 and makes new loans of $2000 and is just meeting its reserve requirements. The required reserve ratio is:

13) Finish this sentence: Suppose that the Federal Reserve buys $600 billion worth of government securities from the public. If the required reserve ratio is 33.3 percent, the maximum increase in the money supply is

14) Finish this sentence: Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 20 percent. If Maggie deposits the $50 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

Fed Structure/Monetary Policy/T-chart Quiz

If a commercial bank has no excess reserves and the reserve requirement is 10 percent, by how much will required reserves increase if a new customer deposits $10,000? A) $100,000 B) $90,333 C) $10,000 D) $9,000 E) $1,000

A single commercial bank must meet a 25% reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can loan out a maximum of: a. $2,000 b. $1,500 c. $1,250 d. $1,000

A single commercial bank must meet a 25% reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, the bank’s excess reserves have just risen by: a. $250 b. $500 c. $1,000 d. $1,500

Which of the following are liabilities to a bank? a. capital stock and reserves b. property and capital stock c. vault cash and demand deposits d. capital stock and demand deposits

Bank’s T-Account Scenario: Fed buys bonds from bank (Open Mkt Purchases). Assets Liabilities A) Reserves Demand Deposits B) Bonds Reserves C) Bonds No Change D) Reserves No Change E) A&C F) C&D

Fed’s T-Account Scenario: Open Market Sales Assets Liabilities A) CurrencyTreasury Bonds B) Treasury BondsCurrency C) CurrencyTreasury Bonds D) Treasury BondsCurrency E) Treasury Bonds No Change F) No Change Currency

Bank’s T-Account Scenario: Jim-Bob deposits $100 cash into his checking account. Assets Liabilities A) Reserves Demand Deposits B) Bonds Reserves C) Bonds No Change D) Reserves No Change E) A&C F) C&D

Bank’s T-Account Scenario: The bank makes new loans. Assets Liabilities A) Reserves No Change B) Loans Reserves C) Loans No Change D) Reserves Loans E) A&C F) C&D

Bank’s T-Account Scenario: Fed sells bonds to bank (Open Mkt Purchases). Assets Liabilities A) Reserves Demand Deposits B) Bonds Reserves C) Bonds No Change D) Reserves No Change E) A&C F) C&D

Fed’s T-Account Scenario: Open Market Purchases Assets Liabilities A) CurrencyTreasury Bonds B) Treasury BondsCurrency C) CurrencyTreasury Bonds D) Treasury BondsCurrency E) Treasury Bonds No Change F) No Change Currency

a)2 points total. 1 point for stating that money supply will not change. 1 point for explanation that cash and checking deposits are both M1. b)2 points total. 1 point for $800 initial loan. 1 point for explanation that required reserves are 20% of $1,000 or $200, leaving $800 excess. c)2 points total. 1 point for stating maximum money creation in banking system as $4, point for explanation that money multiplier is reciprocal of reserve ratio = 1/0.2 = 5. 5 times $800 initial loan = $4,000. d)1 point total. Explanation could include mention of leakages such as people deciding to hold some loan proceeds as cash, some banks deciding to hold excess reserves, etc.