Assume a banking system with many banks. The reserve ratio in all banks is 16 pe
ID: 1198063 • Letter: A
Question
Assume a banking system with many banks. The reserve ratio in all banks is 16 percent and excess reserve is held in the banking system (i.e. banks are all "loaned up"). Now consider the following events.
Sam sells gis government bond to the Fed. Sam received $3,000 in cash, which he promptly deposits in his checking account at his bank, Sembank.
Sembank makes the maximum loan it safely can, which is borrowed by Nicole. She uses it to pay the contractor, Mary, who remodeled Nicole's kitchen. Mary deposits this money into her checking account at Meribank. This bank now makes the maximum loan it can. This process of lending and re-lending will continue though the banking system until there is nothing left to lend.
a.) show all changes in balance sheets of Sembank and Meribank resulting from the above transactions. (Present a SEPARATE balance sheet for each of these two banks).
b.) show the changes in the CONSOLIDATED balance sheet as a result of the above transactions.
Explanation / Answer
a)
Reserve ration=16%
Amount loaned =0.16*3000=2520
Sam Bank
Asset
Liabilities
Fed
480
Sam
3000
Loan
2520
Total
3000
3000
Reserve ratio=16% Amount loaned =0.16*2520=2116.8
Mary bank
Asset
Liabilities
Fed
403.2
Mary
2520
Loan
2116.8
Total
2520
2520
b)
Total money created= (1/reserve ratio)*Initial deposit
Total money created= (1/0.16)*3000=$18750
Total Money loaned=$18750=84%
Total Liabilities=18750/0.84=22321.43
Deposit at Fed=22321.43-18750=$3571.43
Consolidated Balance sheet
Asset
Liabilities
Fed
3571.43
Sam
22321.43
Loan
18750
Total
23321.43
23321.43
Sam Bank
Asset
Liabilities
Fed
480
Sam
3000
Loan
2520
Total
3000
3000
Reserve ratio=16% Amount loaned =0.16*2520=2116.8
Mary bank
Asset
Liabilities
Fed
403.2
Mary
2520
Loan
2116.8
Total
2520
2520
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