Kenneth R. Szulczyk
form but at a slower rate. The Great Recession would still have occurred, but the effects
would not have been as harmful and severe.Answers to Chapter 11 Questions.........................................................
- The Fed's assets are the discount loans and holdings of U.S. government securities while its
liabilities are bank reserves and currency in circulation. - Money multiplier shows how the money supply changes, when the monetary base changes.
Consequently, the public, banks, and the Fed all influence the money multiplier. - We calculated:
=$ , =$ million
rΔ = Δ
r1
0.05
1
50000
1
Deposits Reserves ^- We calculated:
50000
0.20
1
10000
1
Deposits Reserves = $ , = $ ,
rΔ = Δ
r ^
- We calculated this below. Do not include the first $1,000 because the person converted a
$1,000 of currency into a bank deposit.
9,000
0.1
1
900
1
Deposits Reserves =$ =$
rΔ = Δ
r
- We calculated this below. Do not include the first $5,000 because the person withdrew
$5,000 from his checking account and converted it into cash.
45000
0.1
1
4,500
1
Deposits Reserves = $ = $ ,
rΔ = Δ
r ^
- Currency-to-deposit ratio represents the portion of money held by the public as currency. An
increase in wealth, higher interest rates, lower risk from bank failures, and an increase in
illegal activities will decrease this ratio. - This occurred during the 2008 Financial Crisis. The Federal Reserve granted $2 trillion in
loans. However, the banks held onto this money and did not increase loans. Thus, the
multiple deposit creation ceased to work. Purpose of the bailout was to get the U.S. banking
system to start lending again. - Banks and the public can thwart a Fed's action by changing their behavior. Banks can hold
excess reserves while the public influence the currency to deposit ratio. - We calculated both the M1 and M2 money multipliers below: