APMacro: Chapter Questions


Dog Taking Test
Chapter questions: #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, & 13 corrections.

Review

  • A bank’s balance sheet must balance. The bank’s assets are claimed by owners (net worth) or by nonowners (liabilities). Assets = liabilities + net worth.
  • The maximum amount of checkable deposit expansion is determined by multiplying two factors: the excess reserves by the money multiplier. However, each factor is affected by the required reserve ratio. The money multiplier is calculated by dividing 1 by the required reserve ratio. Excess reserves are determined by multiplying the required reserve ratio by the amount of new deposits. Therefore, a change in the required reserve ratio will change the money multiplier and the amount of excess reserves. 
  • For example, a required reserve ratio of 25% gives a money multiplier of 4. For $100 in new money deposited, required reserves are $25 and excess reserves are $75. The maximum checkable deposit expansion is $75 x 4 = $300. If the reserve ratio drops to 20%, the money multiplier is 5 and excess reserves are $80, and the maximum checkable deposit expansion is 5 x $80 = $400. Both factors have changed.
  • Be aware that the money multiplier can result in money destruction as well as money creation in the banking system. You should know how the money multiplier reinforces effects in one direction or the other.

Homework:
1) Learnerator: Demand & Supply Equilibrium #1-24, Macroeconomic issues #1-15

Arrows-02-june

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