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i safari File Edit View History Bookmarks Window Help 23%)D Mon 27 Nov 1 1:35:06 AM Q, e ezto.mheducation.com Chapter 9 Homework y, The Republic Of Has No 16.66 points Initially, the Republic of Gorgonzola has no commercial banking system. Then, the govemment directs the central bank of Gorgonzola to put into circulation 4,000,000 identical paper notes, called guilders. The central bank prints the guilders and distributes them to the population. In order to safeguard the money, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or, more conveniently, write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank. Deposits do not pay interest in this economy. 31 Let's suppose for now that people prefer bank deposits to cash and so deposit all of their guilders with the commercial banks. Assume that (1) initially, the Gorgonzolan central bank puts 4,000,000 guilders into circulation and (2) commercial banks desire to hold reserves of 5 percent of deposits. Assume that the public holds no Instructions: Enter your responses as integer values. a. The consolidated balance sheet of Gorgonzolan commercial banks after the initial deposits is: Balance sheet after initial deposits per Assets abilities Currency 4,000,000 Deposits 4,000,000 b. The consolidated balance sheet of Gorgonzolan commercial banks after one round of loans is: Balance sheet after first round of loans Assets bilities Currency reseves 200,000 Deposits 4,000,000 Loans 3,800,000 c. The consolidated balance sheet of Gorgonzolan commercial banks after the first redeposit of guilders is: Balance sheet after redeposits

Explanation / Answer

Assets Liability currency 400000 deposit 400000 b) Assets Liability currency(reseves) 20000 deposit 400000 Loans 380000 c) Assets Liability currency(reseves) 20000 deposit 780000 Loans 760000 d) Assets Liability currency(reseves) 39000 deposit 1540000 Loans 1501000 e) Assets Liability currency(reseves) 77000 deposit 3041000 Loans 2964000 money supply = deposits at each rounds 6161000

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