APPLICATION
Suppose that the reserve requirement is 10% on all deposits and the balance sheet of Peopleâs National Bank looks like the following (in billions):
Assets
Vault Cash $555
Reserves at the Fed $545
Loans Outstanding $657
Securities $1100
Buildings & Equipment $1400
Other Assets $2115
Liabilities
Demand Deposits $545
Savings Deposits $7245
Time Deposits $2210
Other Liabilities $785
Net Worth ??
What is the âNet Worthâ of the bank?
2. What is the dollar value of required reserves for Peopleâs National Bank?
3. Does the bank have any excess reserves?
4. What is the maximum amount of new loans the bank can extend?
5. Indicate how the bankâs balance sheet would be altered if it made these new loans.
6. Suppose that the required reserves were 20 percent; if this were the case, would the bank be in a position to extend any additional loans? Would it satisfy the reserve requirement?
2. Imaging the FED engages in an open market sale of $25 million; using a balance sheet for both the bank and the FED, illustrate the changes.
3. If an individual moves $500 from their checking to their savings, how will this affect M), M1, M2, and M3? What about moving funds from savings to checking?
APPLICATION
Suppose that the reserve requirement is 10% on all deposits and the balance sheet of Peopleâs National Bank looks like the following (in billions):
Assets
Vault Cash $555
Reserves at the Fed $545
Loans Outstanding $657
Securities $1100
Buildings & Equipment $1400
Other Assets $2115
Liabilities
Demand Deposits $545
Savings Deposits $7245
Time Deposits $2210
Other Liabilities $785
Net Worth ??
What is the âNet Worthâ of the bank?
2. What is the dollar value of required reserves for Peopleâs National Bank?
3. Does the bank have any excess reserves?
4. What is the maximum amount of new loans the bank can extend?
5. Indicate how the bankâs balance sheet would be altered if it made these new loans.
6. Suppose that the required reserves were 20 percent; if this were the case, would the bank be in a position to extend any additional loans? Would it satisfy the reserve requirement?
2. Imaging the FED engages in an open market sale of $25 million; using a balance sheet for both the bank and the FED, illustrate the changes.
3. If an individual moves $500 from their checking to their savings, how will this affect M), M1, M2, and M3? What about moving funds from savings to checking?
Related textbook solutions
Related questions
QUESTION 1
Refer to this scenario for all of the questions on this problem set.
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BALANCE SHEET OF A MONOPOLY BANK |
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ASSETS |
LIABILITIES AND CAPITAL |
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Reserves: 500 Loans and Securities: 4,500 Other Assets: 1,000 Total Assets 6,000 |
Checkable Deposits: 5,000 Capital: 1,000 Total Liabilities & Capital 6,000 |
The balance sheet of the only bank in a simple economy is shown below. The reserve requirement is 10%. If cash in the hands of the non-bank public is $3,000, the Money Supply = ___________________.
QUESTION 2
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BALANCE SHEET OF A MONOPOLY BANK |
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ASSETS |
LIABILITIES AND CAPITAL |
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Reserves: 500 Loans and Securities: 4,500 Other Assets: 1,000 Total Assets 6,000 |
Checkable Deposits: 5,000 Capital: 1,000 Total Liabilities & Capital 6,000 |
Suppose people deposit $1,000 of their cash into checking accounts. In the balance sheet below, enter the new totals in all of the accounts, immediately following the transaction, before the bank does any new lending.
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ASSETS |
LIABILITIES AND CAPITAL |
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Reserves: Loans and Securities: Other Assets: 1,000 Total Assets: |
Checkable Deposits
Capital Total Liabilities and Capital: |
QUESTION 3
Recall that cash in the hands of the non-bank public was initially equal to $3,000. Thus, immediately following the $1,000 deposit, currency in the hands of the non-bank public = _____________
QUESTION 4
And Deposits = ______________
Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent.
a. What is the maximum amount of new loans that Big Bucks Bank can make? $.
Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount.
| Assets | Liabilities and net worth | |||||||
| (1) | (2) | (1' ) | (2' ) | |||||
| Reserves | $22,000 | $ | $ | Checkable deposits | $100,000 | $ | $ | |
| Securities | 38,000 | | | |||||
| Loans | 40,000 | | ||||||
b. By how much has the supply of money changed? $.
c. How will the bankâs balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'.
d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make? $.
Show in columns 3 and 3' (below) how the bankâs balance sheet will appear after the bank has lent this additional amount.
By how much has the supply of money changed? $.
| Assets | Liabilities and net worth | |||||||
| (3) | (4) | (3' ) | (4' ) | |||||
| Reserves | $22,000 | $ | $ | Checkable deposits | $100,000 | $ | $ | |
| Securities | 38,000 | | ||||||
| Loans | 40,000 | | ||||||
How will the bankâs balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.
