if a bank has total reserves of $200,000 and $1 million in deposits, how much money can it lend if the required ratio is
a) 4%?
and
b) 6%?
a) If the required reserve ratio is 4%, the bank must hold 4% of its deposits as reserves.
Reserves = Required Reserve Ratio * Deposits
Reserves = 0.04 * $1,000,000
Reserves = $40,000
The bank has $200,000 in reserves already, so it needs to hold an additional $40,000.
The amount the bank can lend is equal to the total deposits minus the required reserves:
Lending Capacity = Deposits - Reserves
Lending Capacity = $1,000,000 - $40,000
Lending Capacity = $960,000
b) If the required reserve ratio is 6%, the bank must hold 6% of its deposits as reserves.
Reserves = Required Reserve Ratio * Deposits
Reserves = 0.06 * $1,000,000
Reserves = $60,000
The bank has $200,000 in reserves already, so it needs to hold an additional $60,000.
The amount the bank can lend is equal to the total deposits minus the required reserves:
Lending Capacity = Deposits - Reserves
Lending Capacity = $1,000,000 - $60,000
Lending Capacity = $940,000
Washington DC- Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. This is the eighth time this year the Fed had cut the discount rate, dropping it from 4.75% at the beginning of the year to a mere .50% now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that the GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession.
If every one-point change in the federal funds rate alters aggregate demand by $200 billion, how far did AD shift in response to the interest rate cuts?
AD shifted to the [blank] by [blank] billion.
To determine how far aggregate demand (AD) shifted in response to the interest rate cuts, we need to know the total change in the federal funds rate.
The initial federal funds rate at the beginning of the year was 4.75%, and it dropped to 0.50%.
The change in the federal funds rate is:
4.75% - 0.50% = 4.25 percentage points
Since every one-point change in the federal funds rate alters aggregate demand by $200 billion, we can calculate the total shift in aggregate demand as:
Total shift in AD = Change in federal funds rate * $200 billion
Total shift in AD = 4.25 * $200 billion
Total shift in AD = $850 billion
AD shifted to the [left] by [850] billion.
From the end of 2011 to the end of 2012, M1 increased from $2,3111 billion to $2,546 billion.
A) By what percentage did M1 increase?
B) If the Fed had used a fixed rule of 3% growth of the money supply, how large [blank] billion would M1 have been in 2012?
A) To calculate the percentage increase in M1, we can use the following formula:
Percentage increase = ((Ending value - Starting value) / Starting value) * 100
Using the given values:
Starting value = $2,311 billion
Ending value = $2,546 billion
Percentage increase = ((2,546 - 2,311) / 2,311) * 100
Percentage increase = (235 / 2,311) * 100
Percentage increase ≈ 10.16%
M1 increased by approximately 10.16%.
B) If the Fed had used a fixed rule of 3% growth of the money supply, we can calculate the projected value of M1 in 2012 using the formula:
Projected value = Starting value * (1 + Growth rate)^Number of years
Using the given values:
Starting value = $2,311 billion
Growth rate = 3% or 0.03 (converted to decimal form)
Number of years = 1 (since it's from the end of 2011 to the end of 2012)
Projected value = 2,311 * (1 + 0.03)^1
Projected value = 2,311 * (1.03)
Projected value ≈ $2,380.33 billion
If the Fed had followed a fixed rule of 3% growth of the money supply, M1 would have been around $2,380.33 billion in 2012.
Suppose the economy is initially in equilibrium at an output level of 100 and a price level of 100. The Fed then manages to shift aggregate demand rightward by 20.
Show what happens to output and prices if the aggregate supply curve is (i) horizontal, (ii) vertical, and (iii) upward-sloping, and then answer three questions about output and the price level.
A) which AS curve results in the largest increase in output?
B) which AS curve results in the largest increase in price level?
C) which AS curve results in an increase in both output and the price level?
(i) If the aggregate supply (AS) curve is horizontal, it implies that the economy is operating at full employment and any increase in aggregate demand will only result in an increase in output with no effect on the price level. Therefore, with a horizontal AS curve, output will increase by 20 (the shift in aggregate demand) to a new equilibrium level of 120, while the price level remains unchanged at 100.
(ii) If the AS curve is vertical, it indicates that the economy is experiencing a situation of stagflation or supply side constraints. In this case, any increase in aggregate demand will not lead to an increase in output but will solely result in an increase in the price level. Therefore, with a vertical AS curve, output remains unchanged at 100, while the price level increases by 20 to a new equilibrium level of 120.
(iii) If the AS curve is upward-sloping, it implies that there are some factors limiting the expansion of output, such as limited resources or capacity constraints. In this case, an increase in aggregate demand will lead to both an increase in output and a rise in the price level.
To answer the questions:
A) The AS curve that results in the largest increase in output is the horizontal AS curve, as it allows for a full increase in output (20) with no impact on the price level.
B) The AS curve that results in the largest increase in the price level is the vertical AS curve, as it prevents any increase in output but leads to a full increase in the price level (20).
C) The AS curve that results in an increase in both output and the price level is the upward-sloping AS curve. With this curve, the increase in aggregate demand (20) will cause an increase in both output and the price level, though the extent of increase will depend on the specific shape and slope of the upward-sloping AS curve.