Reference no: EM13205277

Balance Sheet for Princeton Bank (amounts in millions of dollars)

Consider the following balance sheet of Princeton Bank: Assets- Reserves 30, Securities 140, Loans 280, total assets 450. Liabilities+ Capital- Transactions deposits 300, Nontransactions deposits 140, Capital 10, total liabilities + capital 450.

Of Princeton Bank's reserves, $6 million are required clearing balances held at the Federal Reserve Bank of Philadelphia. Statistics for the economy as a whole are D= $2,000 billion, R= $200 billion, C/D= 0.2=ratio of currency to transactions deposits, N/D= 2.0= ratio of nontransactions deposits to transactions deposits, MMF/D = 1.6 = ratio of retail money-market mutual funds to transactions deposits, q = 0.08 = 8% = required reserve ratio on transactions deposits = RR/D = ratio of required reserves to transactions deposits RCB/D = 0.02 = 2%= ratio of required clearing balances to transactions deposits.

A- Calculate the monetary base MB, M1, and M2. Are there any excess reserves in Princeton Bank? Are there any excess reserves in the economy as a whole?

B- Calculate the multipilers for M1 and M2.

C- Calculate the values of N, D, C, R, MMF, and RCB using the fact that C/D = 0.2 and C + D = M1.

D- Suppose that the Fed raises the reserve requirement on transactions deposits to 0.18 = 18%. What happens to Princeton Bank's balance sheet? Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R ?

E- Suppose that instead of raising the reserve requirement as in part c, the Fed sells $150 billion of securities in the open market, including $30 million to a customer of Princerton Bank. What happens to Princeton Bank's balance sheet? Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R?