TUTORIAL 10

THE MONEY SUPPLY PROCESS

Part 1. Review questions

1. List central bank balance sheet’s main items
2. Describe multiple deposit creation process
 Part 2. Multiple-choice questions

1. The largest source of Federal Reserve System income is:

A. Fees charged to member banks.
B. Interest and capital gains on government securities.
C. Discount loans.
D. Interest on loans to businesses.

2. When the Fed sells governments securities to a private firm or individual who
pays for them with a check
A. Currency in circulation decreases.
B. The money supply increases.
C. Bank reserves increase.
D. Bank reserves decrease.
Case 2 in the board
3. The monetary base (or high-powered money) is equal to:
A. Federal Reserve float.
B. Fed security holdings + discount loans.
C. reserves + outstanding Federal Reserve notes.
D. reserves + currency in circulation.

4. An open market purchase of securities by the Fed from banks will:

A. increase bank security holdings.
B. increase bank loans.
C. increase bank reserves.
D. increase the public's currency holdings.
Case 1
5. An open market purchase of securities by the Fed from the public will:
A. always increase the monetary base.
B. always increase bank reserves.
C. always increase the public's currency holdings.
D. always increase bank loans.
Case 2 and 3
6. If a bank borrows from the Fed at the discount window, then:
A. bank reserves increase.
B. bank loans will increase.
C. Federal Reserve notes outstanding will increase.
D. currency holdings by the public will increase.
Case discount lending
7. Bank A faces a 15% reserve requirement ratio. If this bank gains $100 of
deposits and $100 of new reserves, then this bank has:
A. $85 of new required reserves.
B. $15 of excess reserves.
C. $15 of new loans.
D. $15 of new required reserves

8. As banks make new loans, they will:

A. increase reserves.
B. increase discount loans.
C. lose reserves.
D. increase security holdings.

9. If banks have a 20% reserve requirement ratio, then for the banking system
an addition of $100 of new reserves will create:
A. $500 of new reserves.
B. $500 of new excess reserves.
C. $500 of new deposits.
D. $500 of security holdings on the Fed's balance sheet.
100/20%
Changes D= changes reserve / r
10. The formula for the simple deposit multiplier can be expressed as
A) △R = r × △D
B) △D = 1/r × △R
C) △r = 1/R × △R
D) △R = 1/r × △D

11. Which of the following is not a player in the money supply process?
A. The central bank
B. Borrowers
C. Depository institutions
D. Congressional banking committees

12. On the Federal Reserve System's balance sheet, float is:

A. the monetary base minus high-powered money.
B. cash items in process of collection minus deferred-availability cash items.
C. total reserves minus excess reserves.
D. Federal Reserve assets minus Federal Reserve liabilities.
Bank A – Bank B

13. Which of the following is an assumption of the simple model of multiple

deposit creation?
A. Depositors hold no currency.
B. Banks do not lend all their excess reserves.
C. Open market sales increase bank reserves.
D. The required reserve ratio is zero.
14. If bank depositors begin to withdraw more currency from banks,
A. The monetary base is unchanged.
B. The monetary base decreases.
C. Bank reserves increase.
D. Bank reserves are unchanged.
Reserve reduce but currency increase with the same amount so it unchanged
15. The maximum amount a bank can lend is
A. The amount it has on deposit with the Fed.
B. The amount of its total reserves.
 C. 90 percent of its deposits.
D. The amount of its excess reserves.

Part 3. End-of-chapter questions

Chapter 15: Question 1, 2, 18, 20, 21, 25

1. Classify each of these transactions as an asset, a liability, or neither for each of

the “players” in the money supply process—the Federal Reserve, banks, and
depositors.
a. You get a $10,000 loan from the bank to buy an automobile.
b. You deposit $400 into your checking account at the local bank.
c. The Fed provides an emergency loan to a bank for $1,000,000.
d. A bank borrows $500,000 in overnight loans from another bank.
e. You use your debit card to purchase a meal at a restaurant for $100.

2. The First National Bank receives an extra $100 of reserves but decides not to
lend but any of these reserves. How much deposit creation takes place for the
entire banking system?

18. If the Fed lends five banks a total of $100 million but depositors withdraw $50
million and hold it as currency, what happens to reserves and the monetary base? Use
T-accounts to explain your answer.
Non benk public : depositor
Deposits – 50 mil
Currency +50

Banks
Asset Liabilities

Reserves +100mi Borrow from feb +100m (borrow from fed)

Checkable deposit -50m
-50
=+50mil
Feds reserve
A L
loan + 100 m Reserve +100m

20. Using T-accounts, show what happens to checkable deposits in the banking
system when the Fed sells $2 million of bonds to the First National Bank.

21.If the Fed buys $1 million of bonds from the First National Bank, but an additional
10% of any deposit is held as excess reserves=required reserve , what is the total
increase in checkable deposits? (Hint: Use T-accounts to show what happens at each
step of the multiple expansion process (một hình thức kinh doanh chênh lệch giá sử
dụng việc mua chứng khoán ở bội số định giá thấp hơn và bán chứng khoán ở bội số
định giá cao hơn .);

25. Suppose that the required reserve ratio is 9%, currency in circulation is $620
billion, the amount of checkable deposits is $950 billion, and excess reserves are $15
billion.

a. Calculate the money supply = 620+ 950= 1570 , the currency deposit
ratio=Current/ , the excess reserve ratio=, and the money multiplier.

b. Suppose the central bank conducts an unusually large open market purchase of
bonds held by banks of $1,300 billion due to a sharp contraction in the economy.
Assuming the ratios you calculated in part (a) remain the same, predict the effect on
the money supply.

c. Suppose the central bank conducts the same open market purchase as in part (b),
except that banks choose to hold all of these proceeds as excess reserves rather than
loan them out, due to fear of a financial crisis. Assuming that currency and deposits
remain the same, what happens to the amount of excess reserves, the excess reserve
ratio, the money supply, and the money multiplier?

d. Following the financial crisis in 2008, the Federal Reserve began injecting the
banking system with massive amounts of liquidity, and at the same time,
very little lending occurred. As a result, the M1 money multiplier was below 1 for
most of the time from October 2008 through 2011. How does this scenario relate to
your answer to part (c)?