金融货币学课后习题答案

CHAPTER3WHATISMONEY?

1.(b)

3.Cavemendidnotneedmoney.Intheirprimitiveeconomy,theydidnotspecializeinproducingonetypeofgoodandtheyhad

littleneedtotradewithothercavemen.

5.Wineismoredifficulttotransportthangoldandisalsomoreperishable.Goldisthusabetterstoreofvaluethanwineandalso

leadstolowertransactionscost.Itisthereforeabettercandidateforuseasmoney.

7.Notnecessarily.Checkshavetheadvantageinthattheyprovideyouwithreceipts,areeasiertokeeptrackof,andmaymakeit

harderforsomeonetostealmoneyoutofyouraccount.Theseadvantagesofchecksmayexplainwhythemovementtowarda

checklesssocietyhasbeenverygradual.

8.Therankingfrommostliquidtoleastliquidis:(a),(c),(e),(f),(b),and(d).

10.BecauseoftherapidinflationinBrazil,thedomesticcurrency,thereal,isapoorstoreofvalue.Thusmanypeoplewouldrather

holddollars,whichareabetterstoreofvalue,andusethemintheirdailyshopping.

14.(a)M1,M2,andM3,(b)M2andM3fbrretailMMFsandM3fbrinstitutionalMMFs,(c)M3,(d)M2andM3,(e)M3,(f)Ml,

M2,andM3.

CHAPTER4UNDERSTANDINGINTERESTRATES

2.No,becausethepresentdiscountedvalueofthesepaymentsisnecessarilylessthan$20millionaslongastheinterestrateis

greaterthanzero.

4.Theyieldtomaturityislessthan10percent.Onlyiftheinterestratewaslessthan10percentwouldthepresentvalueofthe

paymentsaddupto$4,000,whichismorethanthe$3,000presentvalueinthepreviousproblem.

6.25%=($1,000-S800)/$800=$200/$800=.25.

8.Iftheinterestratewere12percent,thepresentdiscountedvalueofthepaymentsonthegovernmentloanarenecessarilyless

thanthe$1,000loanamountbecausetheydonotstartfortwoyears.Thustheyieldtomaturitymustbelowerthan12percentin

orderforthepresentdiscountedvalueofthesepaymentstoaddupto$1,000.

10.Thecurrentyieldwillbeagoodapproximationtotheyieldtomaturitywheneverthebondpriceisveryclosetoparorwhenthe

maturityofthebondisovertenyears.

12.Youwouldratherbeholdinglong-termbondsbecausetheirpricewouldincreasemorethanthepriceoftheshort-termbonds,

givingthemahigherreturn.

14.Peoplearemorelikelytobuyhousesbecausetherealinterestratewhenpurchasingahousehasfallenfrom3percent(=5

percent-2percent)to1percent(=10percent-9percent).Therealcostoffinancingthehouseisthuslower,eventhough

mortgagerateshaverisen.(Ifthetaxdeductibilityofinterestpaymentsisallowedfbr,thenitbecomesevenmorelikelythat

peoplewillbuyhouses.)

CHAPTER5THEBEHAVIOROFINTERESTRATES

1.(a)Less,becauseyourwealthhasdeclined;(b)more,becauseitsrelativeexpectedreturnhasrisen;(c)less,becauseithas

becomelessliquidrelativetobonds;(d)less,becauseitsexpectedreturnhasfallenrelativetogold;(e)more,becauseithas

becomelessriskyrelativetobonds.

3.(a)More,becauseithasbecomemoreliquid;(b)less,becauseithasbecomemorerisky;(c)more,becauseitsexpectedreturn

hasrisen;(d)more,becauseitsexpectedreturnhasrisenrelativetotheexpectedreturnonlong-termbonds,whichhasdeclined.

5.Theriseinthevalueofstockswouldincreasepeople'swealthandthereforethedemandfbrRembrandtswouldrise.

7.Intheloanablefundsframework,whentheeconomybooms,thedemandfbrbondsincreases:thepublic'sincomeandwealth

riseswhilethesupplyofbondsalsoincreases,becausefirmshavemoreattractiveinvestmentopportunities.Boththesupplyand

demandcurves(BdandBs)shifttotheright,butasisindicatedinthetext,thedemandcurveprobablyshiftslessthanthesupply

curvesotheequilibriuminterestraterises.Similarly,whentheeconomyentersarecession,boththesupplyanddemandcurves

shifttotheleft,butthedemandcurveshiftslessthanthesupplycurvesothattheinterestratefalls.Theconclusionisthat

interestratesriseduringboomsandfallduringrecessions:thatis,interestratesareprocyclical.Thesameanswerisfoundwith

theliquiditypreferenceframework.Whentheeconomybooms,thedemandfbrmoneyincreases:peopleneedmoremoneyto

carryoutanincreasedamountoftransactionsandalsobecausetheirwealthhasrisen.Thedemandcurve,Md,thusshiftstothe

right,raisingtheequilibriuminterestrate.Whentheeconomyentersarecession,thedemandfbrmoneyfallsandthedemand

curveshiftstotheleft,loweringtheequilibriuminterestrate.Again,interestratesareseentobeprocyclical.

10.Interestratesfall.Theincreasedvolatilityofgoldpricesmakesbondsrelativelylessriskyrelativetogoldandcausesthe

demandfbrbondstoincrease.Thedemandcurve,Bd,shiftstotherightandtheequilibriuminterestratefalls.

12.Interestratesmightrise.ThelargefederaldeficitsrequiretheTreasurytoissuemorebonds;thusthesupplyofbondsincreases.

Thesupplycurve,Bs,shiftstotherightandtheequilibriuminterestraterises.SomeeconomistsbelievethatwhentheTreasury

issuesmorebonds,thedemandfbrbondsincreasesbecausetheissueofbondsincreasesthepublic'swealth.Inthiscase,the

demandcurve,Bd,alsoshiftstotheright,anditisnolongerclearthattheequilibriuminterestratewillrise.Thusthereissome

ambiguityintheanswertothisquestion.

14.Thepriceleveleffecthasitsmaximumimpactbytheendofthefirstyear,andsincethepriceleveldoesnotfallfurther,interest

rateswillnotfallfurtherasaresultofapriceleveleffect.Ontheotherhand,expectedinflationreturnstozerointhesecond

year,sothattheexpectedinflationeffectreturnstozero.Onefactorproducinglowerinterestratesthusdisappears,so,inthe

secondyear,interestratesmayrisesomewhatfromtheirlowpointattheendofthesecondyear.

16.Ifthepublicbelievesthepresident'sprogramwillbesuccessful,interestrateswillfall.Thepresident'sannouncementwill

lowerexpectedinflationsothattheexpectedreturnongoodsdecreasesrelativetobonds.Thedemandfbrbondsincreasesand

thedemandcurve,Bd,shiftstotheright.Foragivennominalinterestrate,thelowerexpectedinflationmeansthatthereal

interestratehasrisen,raisingthecostofborrowingsothatthesupplyofbondsfalls.Theresultingleftwardshiftofthesupply

curve,Bs,andtherightwardshiftofthedemandcurve,Bd,causestheequilibriuminterestratetofall.

18.Interestrateswillrise.Theexpectedincreaseinstockpricesraisestheexpectedreturnonstocksrelativetobondsandsothe

demandfbrbondsfalls.Thedemandcurve,Bd,shiftstotheleftandtheequilibriuminterestraterises.

20.Theslowerrateofmoneygrowthwillleadtoaliquidityeffect,whichraisesinterestrates,whilethelowerpricelevel,income,

andinflationratesinthefuturewilltendtolowerinterestrates.Therearethreepossiblescenariosfbrwhatwillhappen:(a)if

theliquidityeffectislargerthantheothereffects,theninterestrateswillrise;(b)iftheliquidityeffectissmallerthantheother

effectsandexpectedinflationadjustsslowly,theninterestrateswillriseatfirstbutwilleventuallyfallbelowtheirinitiallevel;

and(c)iftheliquidityeffectissmallerthantheexpectedinflationeffectandthereisrapidadjustmentofexpectedinflation,then

interestrateswillimmediatelyfall.

CHAPTER6THERISKANDTERMSTRUCTUREOFINTERESTRATES

1.ThebondwithaCratingshouldhaveahigherinterestratebecauseithasahigherdefaultrisk,whichreducesitsdemandand

raisesitsinterestraterelativetothatontheBaabond.

3.Duringbusinesscyclebooms,fewercorporationsgobankruptandthereislessdefaultriskoncorporatebonds,whichlowers

theirriskpremium.Similarly,duringrecessions,defaultriskoncorporatebondsincreasesandtheirriskpremiumincreases.The

riskpremiumoncorporatebondsisthusanticyclical,risingduringrecessionsandfallingduringbooms.

5.Ifyieldcurvesonaveragewereflat,thiswouldsuggestthattheriskpremiumonlong-termrelativetoshort-termbondswould

equalzeroandwewouldbemorewillingtoaccepttheexpectationshypothesis.

7.(a)Theyieldtomaturitywouldbe5percentforaone-yearbond,5.5percentfbratwo-yearbond,6percentfbrathree-year

bond,6percentforafour-yearbond,and5.8percentfbrafive-yearbond;(b)theyieldtomaturitywouldbe5percentfbra

one-yearbond,4.5percentfbratwo-yearbond,4percentfbrathree-yearbond,4percentfbrafour-yearbond,and4.2percent

fbrafive-yearbond.Theupward-andthendownward-slopingyieldcurvein(a)wouldtendtobeevenmoreupwardslopingif

peoplepreferredshort-termbondsoverlong-termbondsbecauselong-termbondswouldthenhaveapositiveriskpremium.The

downward-andthenupward-slopingyieldcurvein(b)alsowouldtendtobemoreupwardslopingbecauseofthepositiverisk

premiumfbrlong-termbonds.

9.Thesteepupward-slopingyieldcurveatshortermaturitiessuggeststhatshort-terminterestratesareexpectedtorisemoderately

inthenearfuturebecausetheinitial,steepupwardslopeindicatesthattheaverageofexpectedshort-terminterestratesinthe

nearfutureareabovethecurrentshort-terminterestrate.Thedownwardslopefbrlongermaturitiesindicatesthatshort-term

interestratesareeventuallyexpectedtofallsharply.Withapositiveriskpremiumonlong-termbonds,asinthepreferred

habitattheory,adownwardslopeoftheyieldcurveoccursonlyiftheaverageofexpectedshort-terminterestratesisdeclining,

whichoccursonlyifshort-terminterestratesfarintothefuturearefalling.Sinceinterestratesandexpectedinflationmove

together,theyieldcurvesuggeststhatthemarketexpectsinflationtorisemoderatelyinthenearfuturebutfalllateron.

11.Thegovernmentguaranteewillreducethedefaultriskoncorporatebonds,makingthemmoredesirablerelativetoTreasury

securities.TheincreaseddemandfbrcorporatebondsanddecreaseddemandfbrTreasurysecuritieswilllowerinterestrateson

corporatebondsandraisethemonTreasurybonds.

13.Abolishingthetax-exemptfeatureofmunicipalbondswouldmakethemlessdesirablerelativetoTreasurybonds.Theresulting

declineinthedemandfbrmunicipalbondsandincreaseindemandforTreasurybondswouldraisetheinterestrateson

municipalbonds,whiletheinterestratesonTreasurybondswouldfall.

15.Theslopeoftheyieldcurvewouldfallbecausethedropinexpectedfutureshortratesmeansthattheaverageofexpectedfuture

shortratesfallssothatthelongratefalls.

CHAPTER7

TheStockMarket,theTheoryofRationalExpectations,andtheEfficientMarketHypothesis

1.Thevalueofanyinvestmentisfoundbycomputingthevaluetodayofallcashflowstheinvestmentwillgenerateoveritslife.

3.$1/(1+.15)+$20/(1+.15)=$18.26

5.Astockmarketbubblecanoccurifmarketparticipantseitherbelievethatdividendswillhaverapidgrowthorifthey

substantiallylowertherequiredreturnontheirequityinvestments,thusloweringthedenominatorintheGordonmodeland

therebycausingstockpricestoclimb.Byraisinginterestratesthecentralbankcancausetherequiredrateofreturnonequityto

rise,therebykeepingstockpricesfromclimbingasmuch.Alsoraisinginterestratesmayhelpslowtheexpectedgrowthrateof

theeconomyandhenceofdividends,thusalsokeepingstockpricesfromclimbing.

7.AlthoughJoe'sexpectationsaretypicallyquiteaccurate,theycouldstillbeimprovedbyhistakingaccountofasnowfallinhis

forecasts.Sincehisexpectationscouldbeimproved,theyarenotoptimalandhencearenotrationalexpectations.

9.True,asanapproximation.Iflargechangesinastockpricecouldbepredicted,thentheoptimalforecastofthestockreturn

wouldnotequaltheequilibriumreturnforthatstock.Inthiscase,therewouldbeunexploitedprofitopportunitiesinthemarket

andexpectationswouldnotberational.Verysmallchangesinstockpricescouldbepredictable,however,andtheoptimal

forecastofreturnswouldequaltheequilibriumreturn.Inthiscase,anunexploitedprofitopportunitywouldnotexist.

11.Thestockpricewillrise.Eventhoughthecompanyissufferingaloss,thepriceofthestockreflectsanevenlargerexpected

loss.Whenthelossislessthanexpected,efficientmarketstheorythenindicatesthatthestockpricewillrise.

13.Probablynot.Althoughyourbrokerhasdonewellinthepast,efficientmarketstheorysuggeststhatshehasprobablybeen

lucky.Unlessyoubelievethatyourbrokerhasbetterinformationthantherestofthemarket,efficientmarketstheoryindicates

thatyoucannotexpectthebrokertobeatthemarketinthefuture.

15.False.Allthatisrequiredforthemarkettobeefficientsothatpricesreflectinformationonthemonetaryaggregatesisthat

somemarketparticipantseliminateunexploitedprofitopportunities.Noteveryoneinamarkethastobeknowledgeableforthe

markettobeefficient.

17.Becauseinflationislessthanexpected,expectationsoffutureshort-terminterestrateswouldbelowered,andaswelearnedin

Chapter7,long-terminterestrateswouldfall.Thedeclineinlong-terminterestratesimpliesthatlong-termbondpriceswould

rise.

19.No,becausethisexpectedchangeinthevalueofthedollarwouldimplythatthereisahugeunexploitedprofitopportunity(over

a100%expectedreturnatanannualrate).Sincerationalexpectationsrulesoutunexploitedprofitopportunities,suchabig

expectedchangeintheexchangeratecouldnotexist.

CHAPTER8ANECONOMICANALYSISOFFINANCIALSTRUCTURE

1.Financialintermediariescantakeadvantageofeconomiesofscaleandthuslowertransactionscosts.Forexample,mutualfunds

takeadvantageoflowercommissionsbecausethescaleoftheirpurchasesishigherthanforanindividual,whilebanks9large

scaleallowsthemtokeeplegalandcomputingcostspertransactionlow.Economiesofscalewhichhelpfinancial

intermediarieslowertransactionscostsexplainswhyfinancialintermediariesexistandaresoimportanttotheeconomy.

3.No.Ifthelenderknowsasmuchabouttheborrowerastheborrowerdoes,thenthelenderisabletoscreenoutthegoodfrom

thebadcreditrisksandsoadverseselectionwillnotbeaproblem.Similarly,ifthelenderknowswhattheborrowerisupto,

thenmoralhazardwillnotbeaproblembecausethelendercaneasilystoptheborrowerfromengaginginmoralhazard.

5.ThelemonsproblemwouldbelesssevereforfirmslistedontheNewYorkStockExchangebecausetheyaretypicallylarger

corporationsthatarebetterknowninthemarketplace.Thereforeitiseasierforinvestorstogetinformationaboutthemand

figureoutwhetherthefirmisofgoodqualityorisalemon.Thismakestheadverseselection-lemonsproblemlesssevere.

7.Becausethereisasymmetricinformationandthefree-riderproblem,notenoughinformationisavailableinfinancialmarkets.

Thusthereisarationalefbrthegovernmenttoencourageinformationproductionthroughregulationsothatitiseasiertoscreen

outgoodfrombadborrowers,therebyreducingtheadverseselectionproblem.Thegovernmentcanalsohelpreducemoral

hazardandimprovetheperformanceoffinancialmarketsbyenforcingstandardaccountingprinciplesandprosecutingfraud.

9.Yes,thisisanexampleofanadverseselectionproblem.Becauseapersonisrich,thepeoplewhoaremostlikelytowantto

marryhimorheraregolddiggers.Richpeoplethusmaywanttobeextracarefultoscreenoutthosewhoarejustinterestedin

theirmoneyfromthosewhowanttomarryforlove.

11.Thefree-riderproblemmeansthatprivateproducersofinformationwillnotobtainthefullbenefitoftheir

information-producingactivities,andsolessinformationwillbeproduced.Thismeansthattherewillbelessinformation

collectedtoscreenoutgoodfrombadrisks,makingadverseselectionproblemsworse,andthattherewillbelessmonitoringof

borrowers,increasingthemoralhazardproblem.

13.Afinancialcrisisismorelikelytooccurwhentheeconomyisexperiencingdeflationbecausefirmsfindthattheirrealburdenof

indebtednessisincreasingwhilethereisnoincreaseintherealvalueoftheirassets.Theresultingdeclineinafirm'snetworth

increasesadverseselectionandmoralhazardproblemsfacinglenders,makingitmorelikelyafinancialcrisiswilloccurin

whichfinancialmarketsdonotworkefficientlytogetfundstofirmswithproductiveinvestmentopportunities.

15.Asharpincreaseininterestratescanincreasetheadverseselectionproblemdramaticallybecauseindividualsandfirmswiththe

riskiestinvestmentprojectsaretheoneswhoaremostwillingtopayhigherinterestrates.Asharpriseininterestrateswhich

increasesadverseselectionmeansthatlenderswillbemorereluctanttolend,leadingtoafinancialcrisisinwhichfinancial

marketsdonotworkwellandthustoadecliningeconomy.

CHAPTER9BANKINGANDTHEMANAGEMENTOFFINANCIALINSTITUTIONS

1.BecauseifthebankborrowstoofrequentlyfromtheFed,theFedmayrestrictitsabilitytoborrowinthefuture.

3.TheT-accountsfbrthetwobanksareasfollows:

FirstNationalBankSecondNationalBank

AssetsLiabilitiesAssetsLiabilities

ReservesCheckableReservesCheckable

-$50-$50+$50+$50

DepositsDeposits

5.The$50milliondepositoutflowmeansthatreservesfallby$50millionto$25million.SincerequiredreservesareS45million

(10percentoftheS450millionofdeposits),yourbankneedstoacquire$20millionofreserves.Youcouldobtainthese

reservesbyeithercallinginorsellingoff$20millionofloans,byborrowing$20millionindiscountloansfromtheFed,by

borrowing$20millionfromotherbanksorcorporations,byselling$20millionofsecurities,orbysomecombinationofallof

these.

7.Becausewhenadepositoutflowoccurs,abankisabletoborrowreservesintheseovernightloanmarketsquickly;thus,itdoes

notneedtoacquirereservesatahighcostbycallinginorsellingoffloans.Thepresenceofovernightloanmarketsthusreduces

thecostsassociatedwithdepositoutflows,sobankswillholdfewerexcessreserves.

9.TolowercapitalandraiseROEholdingitsassetsconstant,itcanpayoutmoredividendsorbuybacksomeofitsshares.

Alternatively,itcankeepitscapitalconstant,butincreasetheamountofitsassetsbyacquiringnewfundsandthenseekingout

newloanbusinessorpurchasingmoresecuritieswiththesenewfunds.

11.Inorderfbrabankertoreduceadverseselectionshemustscreenoutgoodfrombadcreditrisksbylearningallshecanabout

potentialborrowers.Similarlyinordertominimizemoralhazard,shemustcontinuallymonitorborrowerstoensurethatthey

arecomplyingwithrestrictiveloancovenants.Henceitpaysfbrthebankertobenosy.

13.False.Althoughdiversificationisadesirablestrategyfbrabank,itmaystillmakesenseforabanktospecializeincertaintypes

oflending.Forexample,abankmayhavedevelopedexpertiseinscreeningandmonitoringaparticularkindofloan,thus

improvingitsabilitytohandleproblemsofadverseselectionandmoralhazard.

15.Thegapis$10million(S30millionofrate-sensitiveassetsminus$20millionofrate-sensitiveliabilities).Thechangeinbank

profitsfromtheinterestrateriseis+0.5million(5%x$10million);theinterestrateriskcanbereducedbyincreasing

rate-sensitiveliabilitiesto$30millionorbyreducingrate-sensitiveassetstoS20million.Alternatively,youcouldengageinan

interestrateswapinwhichyouswaptheintereston$10millionofrate-sensitiveassetsfbrtheinterestonanotherbank'sS10

millionoffixed-rateassets.

CHAPTER10BANKINGINDUSTRY:STRUCTUREANDCOMPETITION

1.AgriculturalandotherinterestsintheU.S.werequitesuspiciousofcentralizedpowerandthusopposedthecreationofacentral

bank.

3.False.AlthoughtherearemanymorebanksintheUnitedStatesthaninCanada,thisdoesnotmeanthattheAmericanbanking

systemismorecompetitive.ThereasonfbrthelargenumberofU.S.banksisanticompetitiveregulationssuchasrestrictionson

banking.

5.Becausebecomingabankholdingcompanyallowsabankto:(1)circumventbranchingrestrictionssinceitcanowna

controllinginterestinseveralbanksevenifbranchingisnotpermitted,and(2)engageinotheractivitiesrelatedtobankingthat

canbehighlyprofitable.

7.Creditunionsaresmallbecausetheyonlyhavememberswhoshareacommonemployerorareassociatedwithaparticular

organization.

9.IBFsencourageAmericanandforeignbankstodomorebankingbusinessintheUnitedStates,thusshiftingemploymentfrom

EuropetotheUnitedStates.

11.Thefactsthatbanks'importanceasasourceoftotalcreditadvancedhasshrunk,bankprofitabilityasmeasuredbyROAand

ROEhasdeclined,andbankfailureshavebeenrunningatmuchhigherratesstartinginthe1980s.

13.True.Higherinflationhelpedraiseinterestrateswhichcausedthedisintermediationprocesstooccurandwhichhelpedcreate

moneymarketmutualfunds.Asaresultbanks9lostcostadvantagesontheliabilitiessideoftheirbalancesheetsandthishasled

toalesshealthybankingindustry.However,improvedinformationtechnologywouldstillhaveerodedthebanks'income

advantagesontheassetssideoftheirbalancesheet,sothedeclineinthebankingindustrywouldstillhaveoccurred.

15.Uncertain.Theinventionofthecomputerdidhelplowertransactioncostsandthecostsofcollectinginformation,bothofwhich

havemadeotherfinancialinstitutionsmorecompetitivewithbanksandhaveallowedcorporationstobypassbanksandborrow

directlyfromsecuritiesmarkets.Therefore,computerswereanimportantfactorinthedeclineofthebankingsystem.However,

anothersourceofthedeclineinthebankingindustrywasthelossofcostadvantagesforthebanksinacquiringfunds,andthis

losswasduetofactorsunrelatedtotheinventionofthecomputer,suchastheriseininflationanditsinteractionwith

regulationswhichproduceddisintermediation.

Chapter13MultipleDepositCreationandtheMoneySupplyProcess

1.Reservesandthemonetarybasefallby$2million,asthefollowingT-accountsindicate:

FirstNationalBankFederalReserveSystem

AssetsLiabilitiesAssetsLiabilities

Reserves-$2Reserves-$2millionSecurities-$2

millionmillion

Securities+$2

million

4.None.

6.TheFedsaleofbondstotheFirstNationalBankreducesreservesbyS2million;theT-accountsareidenticaltothoseinthe

sectiontitled"MultipleDepositContraction,exceptthatalltheentriesaremultipliedby20,000(thatis,-SI00becomes-$2

million).Thenetresultisthatcheckabledepositsdeclineby$20million.

8.Thetotalincreaseincheckabledepositsisonly$5million,substantiallylessthanthe$10millionthatoccurswhennoexcess

reservesareheld.Thereasonisthatbanksnowendupholding20percentofdepositsasreservesandonlylendout80percent,

sothattheincreaseindepositsfoundintheT-accountsis$1,000,000+$800,000+$640,000+$512,000+$409,600+...=$5

million.

10.Thebankingsystemisstillnotinequilibriumbecausetherecontinuestobe$100millionofexcessreserves

(=$1billionofreservesminus$900millionofrequiredreserves,10percentofthe$9billionofdeposits).Theexcessreserves

willbelentoutuntilequilibriumisreachedwithanadditional$1billionofcheckabledeposits.TheT-accountfbrthebanking

systemwhenitisinequilibriumisasfollows:

BankingSystem

AssetsLiabilities

Reserves+$1DiscountLoans+$1

billionbillion

Loans,+$10Checkabledeposits+$10billion

billion

12.$500=$100/0.2,astheformulainEquation(1)indicates.

14.None.Thereductionof$10millionindiscountloansandincreaseof$10millionofbondsheldbytheFedleavesthelevelof

reservesunchangedsothatcheckabledepositsremainunchanged.

CHAPTER14

DeterminantsoftheMoneySupply

2.False.Therewouldstillbeleakageintocurrencyandexcessreservesthatwouldlimittheincreaseindepositexpansion.Wecan

alsoseethisinEquation(4)becausethedenominatorwillnotequalzeroifr=0;therefore,themoneymultiplierwillnotbe

infinite.

4.Theriseinbanks'holdingsofexcessreservesrelativetocheckabledepositsmeantthatthebankingsystemineffecthadfewer

reservestosupportcheckabledeposits.Thusthemo