Introduction to Finance

 12. 
(LO 5.7)
Trace the eff ect on bank reserves of a change in the 
amount of cash held by the public.
 13. 
(LO 5.7)
Describe the eff ect on bank reserves when the Federal 
Reserve sells U.S. government securities to a bank.
 14. 
(LO 5.7)
Summarize the factors that can lead to a change in bank 
reserves.
 15. 
(LO 5.8)
What is the diff erence between the monetary base and 
total bank reserves?
 16. 
(LO 5.8)
Briefl y describe what is meant by the money multiplier 
and indicate the factors that aff ect its magnitude or size.
 17. 
(LO 5.8)
Defi ne the velocity of money, and explain why it is 
important to anticipate changes in money velocity.
 18. 
(LO 5.8)
Why does it seem to be important to regulate and con-
trol the supply of money?

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Problems
129
$1 million and is expected to stay at that level, and there are no other 
leakages or adjustments in the system. 
a. 
What would be the money multiplier and the maximum amount 
of checkable deposits?
b. 
What would be the money supply amount in this system after 
deposit expansion?
9. 
Rework Problem 8, assuming that the cash held by the public drops 
to $500,000 with an equal amount becoming excess reserves and the 
required reserves ratio drops to 12 percent. 
10. 
The COMPLEX fi nancial system has these relationships: the ratio 
of reserves to total deposits is 12 percent, and the ratio of noncheck-
able deposits to checkable deposits is 40 percent. In addition, cur-
rency held by the nonbank public amounts to 15 percent of checkable 
deposits. The ratio of government deposits to checkable deposits is 
8 percent, and the monetary base is $300 million.