Name Date IMONEY, BANKING, AND MONETARY POLICY 1. Here is a consolidated balance
ID: 1203199 • Letter: N
Question
Name Date IMONEY, BANKING, AND MONETARY POLICY 1. Here is a consolidated balance sheet for the entire banking system. TABLE 1a Balance Sheet for Entire Banking System Liabilities and net worth $90,000 Assets Reserves Loans Securities Other Assets $1,000 $ 9,000 $ 50,000 $ 40,000 Deposits Net Worth $10,000 a. If the reserve ratio is 10 percent, is the banking system fully loaned up? Check the appropriate box: Yes No b. Now assume the Fed purchases $1,200 in government securities from banks. Using TABLE 1a values as a starting point, complete the balance sheet in TABLE 1b below TABLE 1b Balance Sheet for Entire Banking System Liabilities and net worth Deposits Net worth Assets Reserves Loans Securities Other Assets $ Use the following formula for computing the money multiplier: [M/B] = [1 + C/D]/[CD + RD + E/D] where: M = Money supply (M1) = D + C D Deposits C = Currency R - Reserves B = Monetary Base R + C C/D= Currency ratio R/D = Reserve ratio E Excess reserves ED Excess reserve ratio Also: [AM/ ARJ = [1 + C/D] , [C/D + RD + ED] where: AR : initial change in reserves, or AB-change in monetary baseExplanation / Answer
a) No, the banking system is not fully loaned up. The total of demand and time liabilities is $90,000. As the reserves are 10% of the demand and time liabilties, hence the bank has to maintain reserves of $9,000. Therefore, they can give total loans upto $81,000 against the current $50,000.
b) The balance sheet will be as follows:
Assets Liabilities and Net worth
Reserves $9,120 Deposits $91,200
Loans $51,200 Net worth $10,000
Securities $40,000
Other Assets $880
a) The deposits have increased by $1,200 ($91,200 - 90,000).
b) The reserves have increased by $120 ($9,120 - $9,000).
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