Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?
Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?
Related questions
1. If the bank suffers the deposit outflow of $6 million, what will its balance now look like? Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 20 percent.
| Assets | Liabilities | ||
| Reserves | $25 million | Deposits | $100 million |
| Loans | $75 million | Bank Capital | $10 million |
| Securities | $10 million | ||
Show this by filling in the amounts in the following balance sheet:
4. If, after selling off securities, the bank is not hit by another $10 in withdrawals of deposits and it sells off all its securities to obtain reserves, what will the balance sheet look like?
| Assets | Liabilities | ||
| Reserves | Deposits | ||
| Loans | Bank Capital | ||
| Securities | |||
6. Using the beginning balance sheet for First National Bank and assuming that First National bank has a net profit after tax of $1,650,000
Calculate First National Bankâs Return on Assets (ROA)
Calculate First National Bankâs Equity Multiplier (EM)
Using the info in a and b, calculate First National Bankâs Return on Equity (ROE).
3. The money supply expansion process
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Suppose First Main Street Bank, Second Republic Bank, and ThirdFidelity Bank all have zero excess reserves. The required reserveratio is 20%. The Federal Reserve buys a government bond worth$750,000 from Clancy, a client of First Main Street Bank. Hedeposits the money into his checking account at First Main StreetBank.
Complete the following table to reflect any changes in FirstMain Street Bank's balance sheet (before the bank makes any newloans).
| Assets | Liabilities | ||
selector 1Reserves
| selector 2$750,000
| selector 3Checkable Deposits
| selector 4$750,000
|
Points:
Close Explanation
Explanation:
Complete the following table to show the effect of a new depositon excess and required reserves when the required reserve ratio is20%.
Hint: If the change is negative, be sure to enter the value as anegative number.
Amount Deposited | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
(Dollars) | (Dollars) | (Dollars) |
| 750,000 |
Points:
Close Explanation
Explanation:
Now, suppose First Main Street Bank loans out all of its newexcess reserves to Becky, who immediately writes a check for thefull amount to Alex. Alex then immediately deposits the funds inhis checking account at Second Republic Bank. Then Second RepublicBank lends out all of its new excess reserves to Clancy, who writesa check to Eileen, who deposits the money in her account at ThirdFidelity Bank. Finally, Third Fidelity lends out all of its newexcess reserves to Kate.
Fill in the following table to show the effect of this ongoingchain of events at each bank. Enter each answer to the nearestdollar.
Increase in Checkable Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
(Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| Third Fidelity Bank |
Points:
Close Explanation
Explanation:
Assume this process continues, with each successive loandeposited into a checking account and no banks keeping any excessreserves. Under these assumptions, the $750,000 injection into themoney supply results in an overall increase of selector 1
- $375,000
- $3,000,000
- $3,750,000
in checkable deposits.
