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ANSWERS, SOLUTIONS, AND EXERCISES
PROBLEM SET
1. With the required reserve ratio equal to 0.2, a $20 billion reserve injection can increase
2. The money supply can increase by a maximum of (1/0.15) x $50 million = $333.33
3. (a), (b), and (d) are all part of the U.S. money supply; (c) is not included because the
4. If the Central Bank buys 50 million zeeks worth of government bonds, this will
increase the country’s money supply by 50 million*(1/0.05) = 500 million*20=1
5. a. If the cash in vault were $8 million instead of $10 million, then the Shareholders’
b. With a required reserve ratio of 0.10, the bank would have deficient reserves, i.e.
$600 in Check Account Deposits would require reserves of $60 million. With only
6. There are two ways to answer this question. One is to assume that the cash that
Mid-Size receives from insurance goes straight to property and building. Then the
value of Property and Buildings will be $40 million - (0.2*$40 million destroyed) +
Another option is to assume that the money received from insurance is kept as cash in
7. With a required reserve ratio of 0.05, the money multiplier is 1/0.05 = 20. Thus:
checking deposits = 20 reserve injection. Since we want the change in checking
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269 Instructor’s Manual for Economics: Principles and Applications, 6e
8. To find the answer, substitute the desired change in the money supply ($500 billion)
and the money multiplier (10 = 1/0.10) into the equation for the change in the money
c. Banks will decrease their lending and accumulate excess reserves; the volume of
10. a. The first five items listed in the problems statement are assets. Therefore, Assets =
Property and buildings + Government bonds + Loans + Cash in vault + Accounts
b. The bank will be solvent as long as the bank’s capital does not become negative.
MORE CHALLENGING
11. a. Mid-Size’s current level of capital is $125/$1000 = 12.5% of its total assets.
b. Mid-Size is still not meeting its capital requirements. Now, the level of capital is
Chapter 25 Money, Banks, and the Federal Reserve 270
c. Mid-Size would have to raise $93.75 million. To find this amount, we have to
solve for X in the following equation (125+X)/(1000+X) = 0.20. Rearranging, we
12. a. Mid-Size Bank is permitted a maximum simple leverage ratio of 5. To find this,
b. Mid-Size’s actual simple leverage ratio is Total Assets/Shareholder’s Equity =
c. To bring down the simple leverage ratio to 5, Mid-Size would have to sell $375
million in assets. To find this number we solve for X in the following equation
13. a. The value of Mid-Size’s Total Assets is now 0.95*$1000 million = $950 million.
Total Liabilities stay the same as before ($875 million), and hence it must be that
b. To get back to the leverage ratio of 8, Mid-Size would have to sell $350 million in
assets. To find this, solve for X in the following equation (950-X)/75 = 8,
EXPERIENTIAL EXERCISES
1. For the latest information about the health of the banking system and individual banks,
including your own, go to the FDIC’s Web site at http://www.fdic.gov. Navigate
2. Review the Fed’s online brochure on the Federal Open Market Committee (FOMC) at
http://www.federalreserve.gov/pubs/frseries/frseri2.htm , especially the sections titled
3. Open-market operations, in which the Federal Reserve buys and sells U.S. government
271 Instructor’s Manual for Economics: Principles and Applications, 6e
