Calculate the amount of required reserves

Reference no: EM131777701

Question: (1) Banks do not hold any excess reserves. Any excess reserves is used to make real estate loans

(2) Households do not hold any currency. All funds that are received are deposited. Suppose the Bank of Florida only liabilities are checkable deposits and it has only 2 assets: required reserves and loans. The balance sheet for the Bank of Florida is illustrated below.

Balance Sheet: Bank of Florida

Assets

Liabilities

Required Reserves: __________

Loans: $750 million

Checkable Deposits: $1000 million

(a) Calculate the amount of required reserves (RR) and the required reserve ratio (rr).

(b) Suppose that the Fed makes an open-market purchase of $10 million by buying $10 million worth of government securities from Mr. Gates. The Fed pays Mr. Gates with a $10 million check, which Mr. Gates takes to his bank, the Bank of Florida and deposits into his checking account. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for the Bank of Florida.

(c) Suppose that the Bank of Florida lends out the funds found in Part(b) to Fred who uses the proceeds to purchase the Pensacola Blue Wahoos (a minor-league baseball team) from Mr. Khan. Mr. Khan deposits the proceeds into his checking account at the Bank of Tennessee. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for the Bank of Tennessee.

(d) Suppose that the Bank of Tennessee lends out the funds found in Part (c) to Daisy who uses the proceeds to purchase a car that was once owned by Elvis from the Graceland Estate. The Graceland Estate deposits the proceeds into its checking account at the Bank of Memphis. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for the Bank of Memphis.

(e) What is the total change in the money supply as a result of the open-market purchase of $10 million by the Federal Reserve?

Reference no: EM131777701

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