CHAPTER 14
BANKING AND THE MONEY SUPPLY
SOLUTIONS TO END OF CHAPTER PROBLEMS
1. When you use a debit card, you tap directly into your checking account, paying with electronic
3. Banks are unlike other financial intermediaries because they can turn a borrower’s IOU into
money—they can create money. Banks are better able than you to evaluate loan applications and
4. The required reserves on the new deposit are ($4,000 × 0.25) = $1,000. The largest loan the bank
5.
a. Bank A’s balance sheet
Assets Liabilities
Chapter 14 Banking and the Money Supply 2
b. Bank B’s balance sheet
Assets Liabilities
c. Bank C’s balance sheet Bank D’s balance sheet
Assets Liabilities Assets Liabilities
Bank E’s balance sheet
Assets Liabilities
d. The change in the money supply depends on the initial change in excess reserves.
e. Holding 5 percent excess reserves reduces the change in the money supply because each
6. Lowering the required reserve ratio from 0.10 to 0.05 will increase the money multiplier from
7.
a. Liabilities increase by $10,000 because of the increase in deposits at the bank, and assets
8.
a. Bank reserves at the Fed and checkable deposits both increase by $10 million.
9. The key to changes in the money supply is the Fed’s impact on excess reserves in the banking
system. To increase excess reserves and thus increase the money supply, the Fed can buy U.S.
10.