Assume a banking system with many banks

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Reference no: EM13984933

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.

Reference no: EM13984933

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