Suppose the following bank balance sheet represents all banks in a small island

Question

Suppose the following bank balance sheet represents all banks in a small island economy Assets: Reserves $5 Million, Loans $80 Million Liabilities + Owner"s Equity: Deposits $60 Million, Owner's Equity $25 Million Assume that banks hold no excess reserves and that the amount of loans in the economy represents the total amount of currency in the hands of the non-bank public a) What is the money-multiplier in this small island economy? b) What is the leverage ratio for these banks? c) If the Federal Reserve sells $2 million in bonds to this bank, what will be the monetary base? What will be the money supply? d) Suppose the Federal Reserve sets a reserve-requirement of 10%. Explain in words what would happen to bank balance sheets and the money based on the numbers given.

Explanation / Answer

the % of deposits in reserve bankhere deposits = 90required reserves = 90 x 0.2 = 18excess reserves = 202c)max amnt of reservesreserve bank sells would be = 137

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