Bank Balance
What is the required amount of excess reserves that banks have to loan out?
There is none! Banks can act independently in this regard!
If the nominal interest rate is 6% and expected inflation is 2%, this is the real interest rate.
What is 4%?
6% − 2% = 4%
When the Federal Reserve buys government securities on the open market, this happens to the money supply.
What is an increase in the money supply?
Senario 1 (Business Cycle)
Q
This riverbank is the setting of Mark Twain’s fictional town of St. Petersburg in The Adventures of Tom Sawyer.
What is the Mississippi River?
On a bank’s balance sheet, demand deposits are classified as this. And why?
What are liabilities?
This curve in the money market is vertical because it is determined by the Federal Reserve.
What is the money supply curve?
If the Federal Reserve sells $50 million in government securities and the required reserve ratio is 10%, this is the maximum change in the money supply.
What is a $500 million decrease in the money supply?
money multiplier = 1 / 0.10 = 10 → $50 million × 10 = $500 million contraction.)
Senario 2
Q
Put these former relationships in chronological order: Kanye West, Damon Thomas, Kris Humphries, Lewis Hamilton, and Pete Davidson
DT, KH, KW, PD, LH
Required reserves and excess reserves are classified as this on a bank’s balance sheet. And why?
What are assets?
If the price level increases, this happens to money demand and nominal interest rates in the short run.
What is an increase in money demand and an increase in nominal interest rates?
If the Federal Reserve decreases the required reserve ratio, this happens to banks’ excess reserves, the money multiplier, and the overall money supply.
What is an increase in excess reserves, an increase in the money multiplier, and an increase in the money supply?
Senario 3
Q
With a hand totaling 16 and the dealer showing a 10, basic strategy typically recommends this action.
A bank has $200 million in deposits and $30 million in reserves. If the required reserve ratio is 10%, this is the maximum amount of additional loans the bank can make.
What is $10 million?
(Required reserves = $20 million → Excess reserves = $10 million → Maximum new loans = $10 million)
Spanish explorers were also known by this term.
Conquistadores
If the Federal Reserve decreases the required reserve ratio during a recession, this will happen to the money supply, the nominal interest rate in the money market, and aggregate demand in the short run (assume no change in inflation expectations).
What is an increase in the money supply, a decrease in nominal interest rates, and an increase in aggregate demand?
↓ RR → ↑ money multiplier → ↑ money supply → rightward shift of money supply → ↓ nominal interest rates → ↑ investment & consumption → ↑ AD.
This president was in office when the Great Depression began in 1929.
Who is Herbert Hoover?
Good Will Hunting: This famous line is repeated by Sean to Will during their emotional breakthrough scene.
What is “It’s not your fault”
A bank initially has no excess reserves. If a customer deposits $50,000 in cash and the required reserve ratio is 20%, this is the immediate change to the bank’s loans and required reserves.
What is loans unchanged and required reserves increase by $10,000?
Assume the economy is currently in long-run equilibrium. The Federal Reserve is concerned about rising inflation and decides to take contractionary monetary policy action.
(a) Using a correctly labeled graph of the money market, show the effect of the Federal Reserve’s action on the nominal interest rate.
(b) Explain how the Federal Reserve’s action affects bond prices.
(c) Using a correctly labeled graph of the aggregate demand–aggregate supply (AD–AS) model, show the short-run effect of the change in the nominal interest rate on output and the price level.
(a) Decrease money supply → MS shifts left → nominal interest rate increases
(b) Bond prices fall
(c) Higher interest rates → lower investment → AD shifts left → lower output and lower price level (short run)
In a limited-reserves system, an open market purchase decreases the federal funds rate by increasing the supply of reserves. In this newer monetary policy framework, however, an open market purchase may not significantly change the federal funds rate because banks already hold more reserves than required.
What is the ample-reserves system?
These severe dust storms of the 1930s devastated farms in the Great Plains and worsened the economic crisis.
Dust Bowls
This long-running animated sitcom reached its 750th episode in 2023, making it one of the longest in U.S. TV history.
What is The Simpsons?