What is the required reserve ratio

Assignment Help Microeconomics

Reference no: EM13212106

1. Suppose a bank's balance sheet looks as follows:

Assets		Liabilities
Reserves	$ 640	Deposits	$6,000
Loans	5,360

And banks are required to hold reserves equal to 10 percent of deposits.

(a) How much excess reserves does the bank hold?

(b) How much more can this bank lend?

Ans:

(a) $__40________

(b) $__40________

6000/10=600

2. Suppose a bank's balance sheet looks like this:

Assets		Liabilities
Reserves		Deposits	$600
Excess	$ 70
Required	30
Loans	500
Total	$600	Total	$600

(a) What is the required reserve ratio?

(b) How much money can this bank still lend?

Ans:

(a)___5_____%

(b) $___70_____

30/600=0.05

2. Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 20 percent, no loans, and no excess reserves in the banking system prior to this deposit.

(a) Use step 1 in the following T-accounts to show how her deposit affects the balance sheet at B of A.

(b) Has the money supply been changed by her deposit?

(d) Has the money supply been changed in step 2?

(e) In step 3 the new borrower(s) writes a check for the amount of the loan in step 2. That check is deposited at another bank, and B of A pays the other bank when the check clears. What does the B of A balance sheet look like now?

(f) After the entire banking system uses the lending capacity of the initial ($12 million) deposit, by how much will the following have changed?

Total reserves

Total deposits

Total loans

Cash held by public

The money supply

Ans:

(a) Step 1:___12,000,000_____________.

Bank of America

Assets (in Millions)		Liabilities (in Millions)
Reserves required	$_2.4__ million	Demand deposits	$_12___ million
Excess	$__9.6__million
Subtotal	$__12__ million
Loans	$___Million
Total assets	$_12__ million	Total liabilities	$_12___million

12000000x20=240000000

12000000-2400000=9600000

2.4+9.6=12

(b) _No___

(c) Step 2: ________

Bank of America

Assets (in Millions)		Liabilities (in Millions)
Reserves required	$__12___ million	Demand deposits	$_12____million
Excess	$_____ million
Subtotal	$_____million
Loans	$_____ million
Total assets	$_____million	Total liabilities	$_____million

(c) __yes___

(e) Step 3: _______

Bank of America

Assets (in Millions)		Liabilities (in Millions)
Reserves required	$____million	Demand deposits	$____ million
Excess	$____million
Subtotal	$____million
Loans	$____million
Total assets	$____million	Total liabilities	$____ million

(f)Total reserves: $__12,000,000___ million

Total deposits: $_____million.

Total loans: $__48,000,000___ million.

Cash held by public: $_____ million.

The money supply: $______ million.

3. Assume that the following data describe the condition of the banking system:

Total reserves $200 billion

Transactions deposits $800 billion

Cash held by public $400 billion

Reserve requirement 0.20

(a) How large is the money supply (M1)?

(b) How large are required reserves?

(d) By how much could the banks increase their lending activity?

Answers:

(a) $_1200_______billion.

(b) $__160______billion.

(d) $__40____billion.

(d) $___5_____billion.

4. Assume the banking system contains the following amounts:

Total reserves $80 billion

Transactions deposits $800 billion

Cash held by public $100 billion

Reserve requirement 0.10

(a) Are the banks fully utilizing their lending capacity?

(b) What would happen to the money supply initially if the public deposited another $30 billion of cash in transactions accounts?

(d) How large would the money supply be if the banks fully utilized their lending capacity?

(e) What three steps could the Fed take to offset that potential growth in M1?

Answers:

(a) ___Yes_______

(b) I think the 30 dollar deposit will be a part of the cash held._________

(c) $______billion.

(d) $__900____billion.

(e)(i) _The fed could sell bonds________________________________

(ii) __The fed could increase their reserve requirement______________________________

(iii) _They could increase their discount rates_______________________________

5. Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves.

Assets (in Billions)		Liabilities (in Billions)
Total reserves	$ 30	Transactions accounts	$400
Securities	$190
Loans	$180
Total	$400	Total	$400

(a) What is the reserve requirement?

(b) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.

(d) Suppose the Fed now buys $10 billion of securities directly from the banks. What will the banks' books look like after this purchase?

(e) How much excess reserves do the banks have now?

(f) By how much can the money supply now increase?

Answers:

Assets (in Billions)		Liabilities (in Billions)
Total reserves	$_6__	Transactions accounts	$___
Securities	$___
Loans	$___
Total	$___	Total	$___

(c) $____ billion.

(d)

Assets (in Billions)		Liabilities (in Billions)
Total reserves	$ ___	Transactions accounts	$____
Securities	$___
Loans	$___
Total	$___	Total	$____

(e) $____ billion.

(f) $____ billion.

Reference no: EM13212106

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