Auxiliary Problems for Chapter 14
1 In what transaction would the Federal Reserve Bank engage, if it wanted to increase the
money supply through open market operations?
2. List the different methods the Federal Reserve Bank can use to increase the money supply in
the economy?
3. What is the money multiplier when the reserve requirement is:
a 0.20
b 0.05
4. Assume that the following data describe the condition of the banking system:
Total Reserves: $300 billion
Transactions Deposits: $900 billion
Cash held by the public: $125 billion
Reserve Requirement: 0.10
a How large is the money supply (M1)?
b How large are required reserves?
c How large are excess reserves?
d By how much could the banks increase their lending activity?
5. In the problem above, suppose the Fed wanted to stop further lending activity by changing
the reserve requirement. What reserve ratio should the Fed impose?
6. Suppose a $1,000 bond pays $80 per year in interest:
a) What is the interest rate on the bond?
b) If market interest rates fall to 5%, what price will the bond sell for?
7. The combined balance sheet of all the commercial banks in the economy is as follows (in
billions of dollars):
Assets Liabilities
Reserves 25 Deposits
250
Government Securities 75
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Loans
150
a Assume this bank has no excess reserves, what is the reserve requirement?
b If the Fed purchases securities of $25 billion, how much in excess reserves do the banks
have immediately after this transaction?
c By how much would the money supply increase if the banks fully utilized their lending
capacity?