Solutions to the End-of-Chapter Questions, Problems, and Data
Exercises
14.1 The Federal Reserve’s Balance Sheet and the Monetary Base
Learning Objective: Explain the relationship between the Fed’s balance sheet and the monetary base.
Review Questions
1.1 The monetary base is the sum of bank reserves and currency in M1. The money supply is the
1.2 The two most important assets on the Fed’s balance sheet are U.S. government securities and
mortgage-backed securities. The two most important liabilities on the Fed’s balance sheet are
1.3
Bank of America
Assets Liabilities
Federal Reserve
Assets Liabilities
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Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process 171
Problems and Applications
1.4 a. Mortgage-backed securities are mortgages bundled together and sold as securities; they function
b. To say that the Fed’s balance sheet is “shrinking” means that the value of the Fed’s assets are
1.5 The size of the balance sheet would stay the same, because the mortgaged-backed securities will
1.6 a.
Banking system
Assets Liabilities
Federal Reserve
Assets Liabilities
b.
Banking system
Assets Liabilities
Federal Reserve
Assets Liabilities
1.7 a. Asset purchases refer to the Fed purchasing assets such as Treasury securities and
mortgage-backed securities.
14.2 The Simple Deposit Multiplier
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Learning Objective: Derive the equation for the simple deposit multiplier and understand what it
means.
Review Questions
2.1 PNC Bank
Assets Liabilities
When PNC sells the securities to the Fed, the Fed pays for them by increasing PNC’s reserve
2.2 The Fed’s purchase of Treasury bills increases bank reserves. A bank with increased reserves
typically loans out its excess reserves and creates an accompanying checking account deposit
Problems and Applications
2.4 The $100,000 loan to Jill’s Jerseys increases Bank of America’s assets by $100,000. Because the
Bank of America
Assets Liabilities
Bank of America
Assets Liabilities
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2.5 The bank can lend out only its excess reserves, which are 90% of the $10,000, or $9,000. The
2.6 a.
JP Morgan Chase Bank: open market sale to Fed
Assets Liabilities
Federal Reserve: open market purchase from JP Morgan Chase Bank
Assets Liabilities
b. Note that JP Morgan can lend out the entire amount of the loan because it has not acquired any
new checkable deposits, so its required reserves have not increased.
JP Morgan: Granted $100 million loan but the borrower has not yet spent the
proceeds of the loan
Assets Liabilities
c.
JP Morgan after loan proceeds have been spent
Assets Liabilities
Wells Fargo after receiving new deposit of $100 million
Assets Liabilities
d. The maximum increase in the money supply that can result from the Fed purchase of $100
million in Treasury bills from JPMorgan Chase is $500 million, as we can see from the equation
for the simple deposit multiplier:
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Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process 174
b. As a result of the sale, the bank’s reserves increase to $23.9 million and its securities fall
Assets Liabilities
c. Loans increase to $155 million, while checkable deposits increase to $185 million. Total
Assets Liabilities
d. Reserves decline by $5 million to $18.9 million, and checkable deposits decline by $5 million to
$180 million.
Assets Liabilities
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2.8 a. People asked the goldsmiths to store gold for them in return for a receipt to prove the gold was
there. Today, we ask banks to store our paychecks and portions of our savings in in the form of
b. Multiple deposit creation would be possible if goldsmiths issued more receipts than they had
2.9 a. The process of the multiple expansion of deposits shows the essence of commercial banking
b. When an individual bank makes a loan and creates the accompanying checking deposit, the
14.3 Banks, the Nonbank Public, and the Money Multiplier
Learning Objective: Explain how the behavior of banks and the nonbank public affect the money
multiplier.
Review Questions
3.1 The money multiplier differs from the simple deposit multiplier in two ways. The money
3.2 a. The higher the C/D ratio, the lower the money multiplier.
3.3 The currency-to-deposit ratio (C/D) fell, and the excess reserves-to-deposit ratio (ER/D) rose
Problems and Applications
3.4 You should disagree. If the required reserve ratio equaled zero, the simple deposit multiplier
would equal infinity, implying that multiple deposit expansion would go on forever. However,
3.5 Investors are buying gold. With an increased number of investors relative to jewelry makers in
3.6 The money multiplier (m) would equal 1:
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3.7 Currency-to-deposit ratio (C/D) $100 billion/$800 billion 0.125
Total reserves to deposits equals $200 billion/$800 billion 0.25
3.8 a. Currency-to-deposit ratio = $850 billion/$700 billion = 1.214
Total reserves-to-deposit ratio $700 billion/$700 billion 1
3.9
(C/D) (R/D)
Monetar
y Base
Money
Multiplie
r
M1 Money
Supply
0.183
2.6
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Currency increased relative to deposits because depositors were withdrawing their funds in
3.10 a. Many banks had suffered severe losses, had experienced runs, and had seen the creditworthiness
c. Because banks did not intend to loan out their excess reserves, the Fed overestimated the size of
d. Increasing the required reserve ratio lowered the money multiplier and reinforced monetary
contraction. To restore previous holdings of excess reserves, banks made fewer loans and
3.11 a. Investing in gold might be considered “nothing but speculation” because gold does not pay
b. To say that the average investor “is not likely to make money” investing in gold means that the
Data Exercises
D14.1 a. In January 2013, the M1 Money Stock was $2,459.8 billion and the St. Louis Adjusted Monetary
D14.2 a. The Currency Component of M1 was $1,090.3 billion and Total Checkable Deposits were
b. Excess Reserves of Depository Institutions were $1,519.46 billion in January 2013. The excess
c. The formula for the money multiplier is:
D14.3 a. The value for Excess Reserves of Depository Institutions was nearly the same in the two months:
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Chapter 14 The Federal Reserve’s Balance Sheet and the Money Supply Process 178
D14.4
a. The trend in the level of the monetary base from 1959 through January 2013 was upward,
b. The monetary base, generally, increased throughout the entire 1959—2013 period. In the 1960—
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