Assume that the Ahearn Bank & Trust has the following balance sheet items: • Res
ID: 1191868 • Letter: A
Question
Assume that the Ahearn Bank & Trust has the following balance sheet items:
• Reserves (R): $25 million• Securities Receivable (Sec Rec): $60 million• Loans Receivable (L Rec): $500 million• Other Assets (OA): $15 million• Transactions Deposits (D): $250 million• Nontransactions Deposits (ND): $300 million
a. If Equity Capital is the only item I left o this list, then how much equity capital does the bank have?
b. Does this bank have any excess reserves?
c. Write out a T-account for this bank. Be sure to:
• split the Reserves account into Required and Excess Reserves.• include the Equity Capital you just calculated• include totals at the bottom
d. If the Federal Reserve wants to increase the money supply, what kind of openmarket operation will it use?
e. If the amount of the open market operation is $10 million, what balance sheetchanges will occur for the bank?
f. How much of the bank’s reserves are required now? How much excess reserves dothey have?
g. WriteoutaT-accountforthebankaftertheopenmarketoperation. Besuretosplitthe Reserves account into the Required and Excess amounts you just calculatedin (f).
h. What is the maximum amount of new loans the bank can issue?
i. If the bank issues the maximum amount of new loans, what balance sheet changeswill occur for the bank?
j. What is the change in M1 after the issue of new loans? How about M2?
Explanation / Answer
(a)
Equity capital = Total assets - Total liabilities
= $(25 + 60 + 500 + 15) mllion - $(250 + 300) million
= $(600 - 550) million = $50 million
(b)
Splitting total reserves into required reserves and excess reserves is not possible unless the required reserve ratio is known. So the answer cannot be provided.
(c)
The T-account is as follows. As explained in part (c), we cannot break-up total reserves.
(d)
If Fed wants to conduct OMO to increase money supply, it will purchase government securities in open market, in exchange for cash.
(e)
For an OMO purchase of $10 million, the Securities Receivable will increase by $10 million to $70 million, and Transaction Deposits will increase by $10 million to $260 million. Equities will remain unchanged.
NOTE: Out of 10 questions, the first 5 are answered.
T-ACCOUNT $Million $Million Reserves 25 Transactions Deposits 250 Securities Receivable 60 Non-Transactions Deposits 300 Loans Receivable 500 Other Assets 15 Equity Capital 50 TOTAL ASSETS 600 TOTAL LIABILITIES AND EQUITY 600