Consider the balance sheet for the Wahoo bank as presented below. Wahoo Bank Bal
ID: 1160019 • Letter: C
Question
Consider the balance sheet for the Wahoo bank as presented below.
Wahoo Bank Balance Sheet
Assets
Liabilities
government securities
$1,600
Liabilities: Checking accounts
$4,000
Required Reserves
$400
Net Worth
$1,000
Excess Reserves
$0
?
?
Loans
$3,000
?
?
Total Assets
$5,000
Total Liabilities
$5,000
Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write the changes to the balance sheet for each of the following scenarios:
Bennett withdraws $500 from his checking account.
The Fed buys $1,000 in government securities from the bank.
4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which of the following scenarios produces a larger increase in the money supply, explain why.
a) Someone takes $1000 from under his or her mattress and deposits it into a checking account.
b) The Fed purchases $1,000 in government securities from a commercial bank.
5) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what is the value of government securities the Fed must purchase if it wants to increase the money supply by $4 million?
Wahoo Bank Balance Sheet
Assets
Liabilities
government securities
$1,600
Liabilities: Checking accounts
$4,000
Required Reserves
$400
Net Worth
$1,000
Excess Reserves
$0
?
?
Loans
$3,000
?
?
Total Assets
$5,000
Total Liabilities
$5,000
Explanation / Answer
1) Bennett withdraws $500 from his checking account
Solution: On the liability side the checking account balance would decrease by $500 leaving the remaining balance of $3500. For balancing the bank sheet the required reserves on the asset side would be decreased by 10% of the withdrawal amount. This would equal $50 reduction, thus $350 balance in required reserves. On the asset side the loan would be decreased by $450.00 leaving a balance of $2550 in loans
2) The Fed buys $1,000 in government securities from the bank
Solution: On the liability side the checking account balance would increase by $1000 leaving the balance of $5,000. On the asset side of the balance sheet there will be a $1000 increase in government securities leaving the balance of $2,600
4) Solution: The Fed purchases $1,000 in government securities from a commercial bank
Working:
Option a:
10%*1000=100
1000 - 100 =900
As depot would be $900.00, thus increase will be 900*10=$9000.
Option b:
$1000*10=$10,000
Because Option b is 1000 times larger and greater than if it was to be deposited in a checking account thus produces a larger increase in the money supply
5) Solution: $400,000
Working: 4,000,000/10x=400,000