Purchase Solution

Money and Banking

Not what you're looking for?

Ask Custom Question

Dubya decides to deposit $5,000 of his cash holdings in Wachovia. The required reserve ratio is set at 10 percent or .10 and the bank does not hold any excess reserves.

a. What is the immediate effect on his deposit on the banking system? Explain.

b. What is the maximum amount of money that Wachovia could loan out? Explain how you determined this amount.

c. What is the maximum of money that the entire banking system can create? Explain how you determined this amount. Show your work.

d. Given one reason why the money supply may not increase in the amount that you have identified in part c.

2. Define the following terms and explain their importance to the study of macroeconomics:

a.
money

b.
M1

c.
Equation of Exchange

d.
Money multiplier

3. How does an open market purchase by the Fed affect the level of bank reserves and the interest rate? That is the FED decided to increase the money supply. Illustrate the interest rate effect by drawing the money market graph. What happens to the quantity of money?

Purchase this Solution
Solution Summary

The solution explains several concepts related to money and banking such as the required reserve ration, M1, Equation of Exchange etc.

Solution Preview

Please find my response attached in the word document.

1. Dubya decides to deposit $5,000 of his cash holdings in Wachovia. The required reserve ratio is set at 10 percent or .10 and the bank does not hold any excess reserves.
a. What is the immediate effect on his deposit on the banking system? Explain.
Answer: As soon as a deposit is made, the bank's liability increases by 5,000 and its reserves increase by 5,000 as well.
b. What is the maximum amount of money that Wachovia could loan out? Explain how you determined this amount.
Answer: The maximum amount Wachovia could loan out is 90% of 5,000, which is 4,500. It is supposed to keep 10% of its liability in reserves.
c. What is the maximum of money that the entire banking system can create? Explain how you determined this amount. Show your work.
Answer: The maximum money the ...

Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • Effect of a Bond Purchase on a Bank's Balance Sheet

    The injection of money into the banking system increases the money supply of the economy. Because the banks now have excess reserves, they will be able to create new loans and increase the money supply further.

  • Current & Future Trends in Financial Services

    * The future trends that would impact my institution would be the use of the mobile phone as a banking and money exchange platform through which creditors can be paid and money withdrawn from.

  • The Banking System

    By being appraised at international forums on banking and the banking system, the country can implement policies and regulation that are attuned with international banking norms.

  • Money supply

    If this $100 stays in the banking system as reserves and if the banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

  • Money, Banking and International Finance

    It defines the concept of banking and its importance for business // Banking Banks are the confidential units to store money and other valuable things. Banks issue many promises to their clients and pay interest to them.

  • Medical Office Operations

    of money.

  • Roosevelt's and the banking crisis

    The bill provided federal authority to reopen and organize banks and to use federal money to supplement the lack of funds that banks had.

  • The required reserve ratio

    If the Fed injects $100,000,000 of reserves into the banking system, by how much will the money supply increase? The required reserve ratio is 10%.

  • bail-out money

    Utility of the bailout money is maximized when the money is used to either turnaround banks ( so that its depositors and shareholders beneifit0 or the banks is allowed to fail slowly in such a way that it does not cause a run on the banking system.

View More Related Solutions