Suppose that Mr Rich withdraws $5 million from his transactions account at the bank of america and holds the money. Assume a reserve requirement of 25 percent and no excess reserves in the banking system prior to this withdrawal. How will the money supply be affected by this transaction? What is the ultimate change in deposits, loans, and reserves in the banking system? Explain in detail.
Suppose that Mr Rich withdraws $5 million from his transactions account at the bank of america and holds the money. Assume a reserve requirement of 25 percent and no excess reserves in the banking system prior to this withdrawal. How will the money supply be affected by this transaction? What is the ultimate change in deposits, loans, and reserves in the banking system? Explain in detail.
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Related questions
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Assets |
Liabilities |
||
|
Required Reserves |
$40,000 |
Checkable Deposits |
$200,000 |
|
Excess Reserves |
$25,000 |
||
|
Government Bonds |
$100,000 |
||
|
Loans |
$30,000 |
||
|
Building & Fixtures |
$15,000 |
Owner's Equity |
$10,000 |
1. Calculate the required reserve ratio. (Show your work)
2. Assume that Pam wants to borrow money to pay for a new car from Sharpeland Bank.
A. What is the maximum amount that Sharpeland Bank can loan out if it wants to keep all of its bonds?
B. What is the maximum amount that the banking system can create given the balance sheet above?
3. Assume instead that Michael withdraws $10,000 in cash from his checking account at Sharpeland.
A. By how much will Sharpeland Bank's reserves change based on Michael's withdrawal? (Be specific.)
B. What is the immediate effect of the withdrawal on the M1 measure of the money supply? Explain.
C. As a result of the withdrawal, what is the new value of excess reserves for Sharpeland Bank based on the reserve requirement from part (a)?
