CH 14 MONEY & BANKING EXAM Q&A
Suppose that Wells Fargo lends $152,000 to Jamal's Jerseys. Using T-accounts,
show how this transaction is recorded on the bank's balance sheet. - Answer--
Loans: $152,000
- Checkable deposits: $152,000
If Jamal's spends the money to buy materials from Zach's Zippers, which has its
checking account at PNC Bank, show the effect on Wells Fargo's balance sheet -
Answer-- Reserves: -$152,000
- Checkable deposits: -$152,000
What is the total change in Wells Fargo's assets and liabilities? - Answer-- The total
change in assets is zero, with an additional $152,000 in loans and a loss of $152,000
of reserves. The total change in liabilities is zero, with the $152,000 checking
account being spent.
Briefly explain what happened to the currency-to-deposit ratio
(C/D) and the excess reserves-to-deposit ratio (ER/D) after the financial crisis of
2007-2009
and before the Covid-19 pandemic in 2020. - Answer-- The currency-to-deposit ratio
(C/D) trended downward and the excess reserves-to-deposit ratio
(ER/D) was erratic until 2015, after which it decreased until the Covid-19 pandemic
in 2020.
What effect did these changes have on the size of the money multiplier? - Answer--
It was erratic until 2015, after which the decrease in ER/D was significantly larger
than the decrease in
C/D, causing the value of the money multiplier to rise.
Explain whether you agree with the following observation: "Since March 2020, the
required reserve ratio has been equal to 0, therefore any increase in the monetary
base can lead to an infinite increase in the money supply." - Answer-- Disagree. If
the required reserve ratio equaled zero, the simple deposit multiplier would equal
infinity, implying that multiple deposit expansion would go on forever. However, the
realistic money multiplier, which includes currency and excess reserve holdings,
would not equal infinity even if the required reserve ratio equaled zero.
Calculate the value of the money multiplier in each of the following situations:
Banks hold no excess reserves, the required reserve ratio is 100%, and households
and firms hold currency and deposits in equal amounts
The value of the money multiplier is ___. - Answer-- 1
The required reserve ratio is 0, banks hold reserves equal to the value of their
deposits, and households and firms hold half as much in currency as in deposits.
The value of the money multiplier is ___. - Answer-- 1
Suppose that Wells Fargo lends $152,000 to Jamal's Jerseys. Using T-accounts,
show how this transaction is recorded on the bank's balance sheet. - Answer--
Loans: $152,000
- Checkable deposits: $152,000
If Jamal's spends the money to buy materials from Zach's Zippers, which has its
checking account at PNC Bank, show the effect on Wells Fargo's balance sheet -
Answer-- Reserves: -$152,000
- Checkable deposits: -$152,000
What is the total change in Wells Fargo's assets and liabilities? - Answer-- The total
change in assets is zero, with an additional $152,000 in loans and a loss of $152,000
of reserves. The total change in liabilities is zero, with the $152,000 checking
account being spent.
Briefly explain what happened to the currency-to-deposit ratio
(C/D) and the excess reserves-to-deposit ratio (ER/D) after the financial crisis of
2007-2009
and before the Covid-19 pandemic in 2020. - Answer-- The currency-to-deposit ratio
(C/D) trended downward and the excess reserves-to-deposit ratio
(ER/D) was erratic until 2015, after which it decreased until the Covid-19 pandemic
in 2020.
What effect did these changes have on the size of the money multiplier? - Answer--
It was erratic until 2015, after which the decrease in ER/D was significantly larger
than the decrease in
C/D, causing the value of the money multiplier to rise.
Explain whether you agree with the following observation: "Since March 2020, the
required reserve ratio has been equal to 0, therefore any increase in the monetary
base can lead to an infinite increase in the money supply." - Answer-- Disagree. If
the required reserve ratio equaled zero, the simple deposit multiplier would equal
infinity, implying that multiple deposit expansion would go on forever. However, the
realistic money multiplier, which includes currency and excess reserve holdings,
would not equal infinity even if the required reserve ratio equaled zero.
Calculate the value of the money multiplier in each of the following situations:
Banks hold no excess reserves, the required reserve ratio is 100%, and households
and firms hold currency and deposits in equal amounts
The value of the money multiplier is ___. - Answer-- 1
The required reserve ratio is 0, banks hold reserves equal to the value of their
deposits, and households and firms hold half as much in currency as in deposits.
The value of the money multiplier is ___. - Answer-- 1
