ALL T-Accounts (Reserve Requirement) FRQ

ALL T-Accounts (Reserve Requirement) FRQ

2016 AP Macroeconomic Exam

Assume that the RRR is 10%

(A.) What is the dollar value of new loans that the bank can make? Explain.

If Demand Deposits (Checkable Deposits) = $2k and the RRR is 10%

then $200 must be kept in Required Reserves

They are being a bit tricky above in that the Reserves includes Required and Excess

Required Reserves = $200

Excess Reserves = $0

Loans = $1, 800

Banks can only loan out what they have in Excess Reserves

This bank has no excess reserves to loan out.

(B.) Mr. Smith deposits $100 of cash in demand deposits, calculate the amount of new loans this bank can make.

$100 deposited into Checkable Deposits (Demand Deposits)

RRR = 10% 

therefore 

Required Reserves = 10% of $100 = $10

Excess Reserves = $90 what is not in Req Res flows into Exc. Res.

This bank can now loan out the $90.

(C.) As a result of the $100 cash deposit calculate over time the amount of the following

(i) Loans

Loans = Money Supply

The MS can increase by taking the amount loaned out $90 x Money Multiplier

the Money Multiplier is 1/RRR

1/RRR = 1/10% or 1/.1 and the multiplier = 10

$90 X 10 = $900 increase in the MS (Loans)

(ii) Demand Deposits (Checkable Deposits)

Demand Deposits = The original Demand Deposit $100 x Money Multiplier

$100 X 10 = $1,000

(D.) What is the maximum change in the MS due to the $100 cash deposit

The Money Supply is increased by Banks making loans

$100 deposited into checkable deposits

RRR = 10%

Req Res = $10

Exc Res = $90

Exc Res loaned out and therefore the MS increases $90 X 10 = $900

(E.) Why could the money supply be less that (D.)

(1) If banks don't loan out excess reserves - the MS can't be expanded if money isn't loaned out

(2) If people take out loans but don't redeposit the money back into the banking system.

2012 AP Macroeconomic Exam

(A.) What is the Reserve Requirement?

Demand Deposits/Reserve Requirements

$100,000/$10,000 = 10%

(B.) Luis withdraws $5,000 in cash from his checking account.

(i) By how much will the banks reserves change based on Luis' withdrawal?

Reserves = Required & Excess Reserves

Reserves were initially $15,000

Now Reserves = $10,000

the change is a decrease of $15,000

(ii) What is the initial effect on the M1 measure of money.

M1 includes (Cash, Coins, & Checkable Deposits)
If Luis takes cash out of Checkable Deposits
then there is no change in the M1
as money is just moving around inside of M1.

(iii) Due to the withdraw what is the effect on excess reserves.

As Luis withdraws the $5000
Demand deposits decreases by $5,000 down to $95, 000
Excess Reserves decreases to 0, Zero
Since Demand Deposits is now $95,000 Req Res only has to be $9,500
the $500 flows into Excess Reserves

(C.) Assume that the next day John withdraws money that exceeds the Banks Excess reserves

how can the Bank cover its required reserves.

2 ways

(1) The Bank can borrow from the FED's Discount window and get the FED's Discount Rate

(2) The Bank can borrow from other Banks called the Federal Funds Rate

2011 AP Macroeconomic Exam


(A.) Calculate the Required reserve ratio?

$10,000/$2,000 = 20%RRR

(B.) The FED purchases $5,000 worth of bonds from Sewell Bank. What will be the change in each of the following?

(i) Excess Reserves

When the Fed buys the bonds the category of bonds reduces to $2,000

The $5,000 from the FED flows into the Excess Reserves

(ii) Demand Deposits

When the FED buys the bonds

Demand Deposits is unaffected

(C.) Calculate the amount the Money Supply could change as a result of the $5,000 purchase of bonds by the FED.

The whole $5,000 dollars in excess reserves can be loaned out

and if it is loaned out

the $5,000 is multiplied by the Money Multiplier

The money multiplier = 1/RRR = 1/.2 = 5

$5,000 X 5 = $25,000

(D.) When the Fed purchases bonds what happens to the price of bonds in the market? Explain.

two ways to think about this

If the Demand for Bonds increases the price of Bonds must increase

or

Understand that Bond Prices and Interest rates are negatively related

When the MS increases the NIR decreases therefore Bond Prices Increase

(E.) An individual deposits $5,000 cash into checkable deposits (demand deposits), what is the immediate effect of the cash deposits on the M1 on the money supply?

M1 is cash, coins and checkable deposit

cash to checkable deposits doesn't effect M1

it's just moving money around inside of M1

2010B AP Macroeconomic Exam

2. Fed sells bonds

(A.) What is the effect on the central bank's action on the consumer loans.

If the FED sells bonds the MS decreases

less money in the banks implies less excess reserves = less loans

(B.)

(C.) What is the effect of the FED's actions.

(i) Price Level

If the FED sells bonds the MS decreases, NIR increase, Investment decreases, AD decreases

therefore the PL decreases

(ii) Real Interest Rate

As the PL decreases the RIR increases (the purchasing power increases)

and as the NIR increases so does the RIR increase

(D.) Given your answer in (C)(ii) how is the currency affected? Explain.

As the RIR increases the Demand for the Ono increase

the value of the Ono increases

2009 AP Macroeconomic Exam

(A.) Assume that Kim deposits $100 of cash into checking account. Calculate each.

(i) Max amount this bank can lend.

$100 into checkable deposit

RRR = 20%

Req Res = $20

Excess Res = $80

(ii) Max amount of change in the demand deposits?

Demand Deposits max change = $100 x 5 = $500

Money Multiplier = 1/RRR = 1/.2 = 5

(iii) Maximum change in the money supply.

 Excess Reserves = $90

$90 x 5(money multiplier) = $400

(B.) Assume the FED buys $5m in government bonds. Calculate the max increase in the money supply.

If the FED buys government bonds all of the $5m flows into Excess Reserves

the entire $5m will be multiplied by the money multiplier

$5m x 5 = $25million

(C.) Given the increase in the MS what happens to real wages in the short-run? Explain.

When the MS increases the NIR decreases

when NIR decrease the RIR decrease

but when the MS increases the PL increases

therefore the RIR decreases 

2009B AP Macroeconomic Exam

(A.) Calculate each of the following.
(i) Total change in reserves in the banking system.

If the FED sells $50m worth of bonds on the open market

then $50m must flow out of reserves to pay for the bonds.

(ii) Maximum change in the money supply.

The maximum change in the MS

The Money Multiplier = 1/RRR or 1/.1 = 10

$50m X 10 = $500m

(B.) Using a Money Market graph show the impact of the bond sale on the NIR.

(C.) How does the bond sale effect the Price Level.

A decrease in the MS decreases the PL

(D.) As a result of the PL change are people with fixed income better off, worse off, or unaffected. Explain.

As the Price Level falls everything is less expensive

meaning that people on fixed incomes can buy more stuff

the purchasing power of their dollars has increased

2007 AP Macroeconomic Exam

(A.) Define the Federal Funds Rate.

Rate of interest that banks charge each other

Bank to Bank Loans

(B.) If the Fed wants to lower the Fed Funds Rate, what open market operation would be appropriate?

The Federal Funds Rate is an interest rate

the FED can influence interest rates by buying or selling bonds

To lower the Fed Funds Rate the FED would buy bonds

(C.) Assume the Open Market Operation is equal to 10m. If the RRR is .2, calculate the Max change in loans throughout the banking system.

If the RRR is .2 or 20%

then the Money Multiplier = 1/RRR or 1/.2 = 5

The Multiplier  = 5

10m X 5 = $50m increase in the MS

at the moment I have no way of explaining why the final answer above is $40m

If the bonds are bought from people then the people deposit the 10m into the bank

20% of the 10m = 2m will be kept in Required Reserves 

and 8m will flow into excess reserves and be loaned out

this would give us the $40m of an increase in the MS

but

The maximum way to increase the money supply

is to assume that the 10m is bought from banks, 

the 10m would then flow directly into Excess Reserves

all 10m would be loaned out and the MS

would increase by a maximum of 50m

(D.) Indicate the effect on the Nominal Interest Rate

Nominal Interest Rates fall

(E.) There is inflation how does this affect the RIR.

The NIR decreases therefore the RIR falls

and

As the PL increases then Real Interest Rates fall

Why?

As the PL increases any gains of Interest Earned are eroded away

Example

The bank will pay you 10% if you deposit 1,000 in their bank

If the PL (Inflation) increases by 10%during the year

then the 1,100 that you receive at the end of the year

will be able to buy exactly the same amount of stuff as when you put the 1,000 in the bank

Your RIR was essentially zero (you made nothing) by loaning the bank 1,000

The PL increase eroded any Nominal Interest you may have earned

2006B AP Macroeconomic Exam

(A.) Assume a bank receives a cash deposit of $9,000 from a customer. What is the immediate effect of this transaction on the money supply?

M1 = cash , coins, checkable deposits

Money from cash to checkable deposits doesn't change the MS

(B.) RRR is 10% and banks voluntarily keep an additional 10% in reserves, calculate the following.
(i) Maximum amount by which the bank will increase its loans from the transaction in part (a).

$9,000 goes into checkable deposits

the RRR is 10%

so, 900 must flow into Required Reserves

the rest flows into excess reserves = $8,100

but, this bank decides to keep an additional 10%, another $900 in reserves

so this bank will loan out $9,000 - $1,800 = $7,200

(ii) Maximum increase in the money supply that will be generated from part (a).

Since the bank is required to keep 10% in Required Reserves and voluntarily

keeps an additional 10% in its excess reserves

the RRR is in essence 20% therefore the Money Multiplier is equal 1/RRR = 5

$7,200 x 5 = $36,000

(C.) Assume the government increases spending by $9,000, which is financed by a sale of bonds

to the central bank.

(i) What happens to the money supply?

Fed buys (bought) bonds therefore the Money supply increases.

(ii) Explain what happens to money demand?

When the government (Fiscal Policy) increases spending

the PL increases which causes the Demand for Money to increase

Demand for Money Cheat Sheet here.

2004 AP Macroeconomic Exam

(A.) As a result of the FED's actions , what is the change in the MS if the RRR is 100%.

If the RRR is 100% then only the initial $5,000 increases the MS

 the MS can't expand anymore as all of the money must be kept in reserves.

(B.) If the RRR is 10%, calculate the following.

(i) Max amount this bank can lend.

$5,000 goes into checkable deposits

the RRR = 10%

so, 10% of the $5,000 ($500) flows into Required Reserves

the additional $4,500 flows into excess reserves

the bank can lend out $4,500 of excess reserves.

(ii) Max increase in the Total MS from the FED's purchase of bonds.

If the RRR = 10% then the Money Multiplier = 1/RRR = 10

so, the MS increases by the amount of loans $4,500 x the Money Multiplier = 10

$4,500 x 10 = $45,000

PLUS the initial purchase of bonds by the FED of $5,000

 = $50,000 increase in the MS

(C.) If the bank decides to keep extra reserves, how will this affect the MS?

If the bank keeps extra reserves then the MS won't expand 
as much.

(D.) If the Public decides to keep money in the form of cash instead of depositing it into the banks, how will this effect the MS, Explain.

If people decide to not redeposit cash back into the banks, 

then the Money creation caused by banks can't happen

no loans = no increase in the MS

2001 AP Macroeconomic Exam

(A.) What is the immediate effect of her deposit on the MS? Explain.

Cash to Checkable deposits or Checkable Deposits to Cash

does not change the M1 category of Money

you are just moving money around into differing categories inside of M1

No effect on the MS

(B.) Maximum amount the bank can loan out? Explain.

RRR = 20% must be kept in Required reserves

$1,000 - 20% = 800

the $800 flows into Excess Reserves and the bank can loan out all of the Excess Reserves

(C.) Maximum amount the banking system can create due to the $1000 deposit.

The RRR = 20%

the Money Multiplier = 1/RRR = 1/.2 = 5

Excess Reserves are loaned out = $800 x 5 = $4,000

(D.) Give one reason the MS may not increase to its maximum.

(1) - Banks may hold excess reserves,,, if not loaned out money expansion can't happen

(2) - People may not redeposit money back into banks,, if the cash can't get into banks then banks can't loan it out.