Extra Help!!!

Friday, April 10, 2020

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.








4 comments:

  1. Thank you for making this easier to understand, I've been having so much trouble with this unit

    ReplyDelete
  2. Thank you for this, I am about to take the exam and you literally saved me

    ReplyDelete