The following are hypothetical consolidated balance sheets for the Federal
Reserve System and the commercial banking system.
(All figures are in billions of U.S. dollars.)
ASSETS LIABILITIES
Securities 400 Federal Reserve Notes 100
Bank Deposits 200
Government Deposits 70
Foreign Deposits 30
Total 400 Total 400
ASSETS LIABILITIES
Federal Reserve Demand Deposits 800
Deposits 200
Loans 500
Securities 100
Total 800 Total 800
In order to simplify the problem, please make the following assumptions:
a. The Net Worth of the Federal Reserve System is zero.
b. The Net Worth of the Commercial Banking System is zero.
c. All Commercial Bank reserves are required reserves.
d. All deposits in Commercial Banks are demand deposits.
e. Commercial Banks hold no cash reserves
f. There are no coins.
I. THE STRUCTURE OF THE MONETARY SYSTEM
QUESTIONS
Use the information contained in the consolidated balance sheets of the
Federal Reserve System and the Commercial Banking System to compute the
following:
1. Actual bank reserves _____________
2. Required reserves _____________
3. Excess reserves _____________
4. The Required Reserve Ratio _____________
5. The Simple money multiplier _____________
6. Currency in circulation _____________
7. The Cash-Deposit Ratio _____________
8. The Actual Money Multiplier _____________
9. The Monetary Base _____________
10. M1 _____________
II. THE EFFECT OF REDUCING THE REQUIRED RESERVE RATIO
1. Assume that the Federal Reserve System reduced the required reserve ratio
to 1/8.
2. Assume that the commercial banking system used this opportunity to make
loans and lent out all their new excess reserves.
3. Assume that the public maintained a Cash-Deposit Ratio of 1/8.
QUESTIONS
Compute the following:
1. The Required Reserve Ratio _____________
2. The Simple Money multiplier _____________
3. The Cash-Deposit Ratio _____________
4. The Actual Money Multiplier _____________
5. The Monetary Base _____________
6. M1 _____________
7. Currency in Circulation _____________
8. Demand Deposits _____________
9. Actual bank reserves _____________
10. Required reserves _____________
11. Excess reserves _____________
12. Commercial bank loans _____________
13. Total Commercial Bank assets ____________
14. Total Commercial Bank liabilities ____________
15. Total Federal Reserve assets ____________
14. Total Federal Reserve liabilities ____________
III. THE EFFECT OF AN OPEN MARKET OPERATION
1. Assume that the Federal Reserve System buys securities worth 100 from
the Commercial Banking System.
2. Assume that the commercial banking system used this opportunity to make
loans and lent out all their new excess reserves.
3. Assume that the public maintained a Cash-Deposit Ratio of 1/8.
QUESTIONS
Compute the following:
1. The Required Reserve Ratio _____________
2. The Simple Money multiplier _____________
3. The Cash-Deposit Ratio _____________
4. The Actual Money Multiplier _____________
5. The Monetary Base _____________
6. M1 _____________
7. Currency in Circulation _____________
8. Demand Deposits _____________
9. Actual bank reserves _____________
10. Required reserves _____________
11. Excess reserves _____________
12. Commercial bank loans _____________
13. Commercial bank securities _____________
14. Total Commercial Bank assets ____________
15. Total Commercial Bank liabilities ____________
16. Federal Reserve Securities ____________
15. Total Federal Reserve assets ____________
14. Total Federal Reserve liabilities ____________
IV. THE NEW STRUCTURE OF THE MONETARY SYSTEM
Fill in the values of the items in the balance sheets of the Federal Reserve
System and the Commercial Banking System as they are after these two Federal
Reserve monetary policy actions have been taken.
ASSETS LIABILITIES
Securities ________ Federal Reserve Notes ______
Bank Deposits _____
Government Deposits _____
Foreign Deposits _____
Total ________ Total _____
ASSETS LIABILITIES
Federal Reserve Demand Deposits ________
Deposits ________
Loans ________
Securities ________
Total ________ Total ________
In the space below show the values before and after these monetary policy
actions.
BEFORE AFTER
1. The simple money multiplier _______ ______
2. The actual money multiplier _______ ______
3. The monetary base _______ ______
4. M1 _______ ______