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.
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.
Related textbook solutions
Related questions
Use the balance sheet below to answer the following questions. The balance sheet of Tucker National Bank
| Assets | Liabilities |
| required reserves $4000 | checkable deposits $20000 |
| EXCESS reserve $16000 | |
| loan 0 | |
| total $20,000 | $20,000 |
a. The reserve ratio is 20%. Show the new figures for assets and liabilities after the bank makes a $10,000 loan.
b. Explain how a bank increases M1 when it makes a loan.
c. Suppose the borrower spends the $10,000. Explain how this allows another bank to make loans.
Changes in Monetary Policy:
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
|
Balance Sheet for Ecoville International Bank |
|||
|
ASSETS |
LIABILITIES |
||
|
Cash |
$33,000 |
Demand Deposits |
$99,000 |
|
Loans |
66,000 |
||
Required:
Now assume that the Fed lowers the reserve requirement to 8%.
1- What is the maximum amount of new loans that this bank can make?
2- Assume that the bank makes these loans. What will the new balance sheet look like?
3- By how much has the money supply increased or decreased?
4- If the money multiplier is 5, how much money will ultimately be created by this event?
5- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?
