Question

need answer ASAP please!!!

Single bank accounting 1. A simplified balance sheet for the local bank is shown below. The required reserve ratio is 20%. All figures are in thousands. (Required reserve for only deposits) / Liabilities and net worth Reserves(Fed) Securities Loans Property $1200 Checkable deposits 750 Stock shares 3500 550 1000 a. How much is this bank required to hold in reserve? How much does the bank currently hold in excess reserves? b. Suppose the bank lends out the full amount of its excess reserves. Modify the balance sheet to reflect the creation of the loan. C. By how much has the money supply increased as a result of the loan? Money creation 2. While clearing debris from a house destroyed by Hurricane Katrina, a group of student helpers discovered a shoe box full of $100 bills--$30,000 in all. The students found the displaced homeowner, who promptly deposited the full amount in the local bank. Suppose the reserve requirement is 25%, and the bank was just meeting its reserve requirement prior to the deposit. a. How much of this new deposit is this bank required to hold in reserve? How much does the deposit create in excess reserves? b. What is the value of the money multiplier? c. What is the potential increase in the money supply this new deposit can generate? d. Repeat parts a through c. assuming a reserve ratio of 10%.

Answer 1

1) Solution:

a) With deposits of $5000 in deposits, require reserves equals $1,000 (= 0.2 * $5000).

With $1200 as the current reserves, the bank's excess reserves are $200 (= $1200 - $1000)

b)

Assets		Liabilities and net worth
Reserves	1,200	Checkable deposits	5,200
Securities	750	Stock shares	1,000
Loans	3,700
Property	550

In the above balance sheet both the loans and checkable deposits increases with $200

c) Because of the loan money supply increased with $200 in the form of checkable deposits

2)

a) Reserves = 0.25 * $30,000 = $7,500.

Excess reserves = 30,000 - 7,500 = $22,500

b) When rr = 0.25, Monetary multiplier = 1/rr = 1/.25 = 4

c) Potential increase in the money supply = 4 * $22,500 = $90,000

d) Excess reserves = 30,000

Potential increase in the money supply = 4 * $30,000 = $120,000

e) Reserves = 0.20 * $30,000 = $6,000.

Excess reserves = 30,000 - 6,000 = $24,000

Monetary multiplier = 1/rr = 1/.2 = 5

Potential increase in the money supply = 5 * $24,000 = $120,000

Excess reserves with the securities sale = 30,000

Potential increase in the money supply with the securities sale = 5 * $30,000 = $150,000