Consider the following simplified balance sheet of a commercial bank: ASSETS LIA
ID: 2797165 • Letter: C
Question
Consider the following simplified balance sheet of a commercial bank:
ASSETS LIABILITIES
Vault cash $200 $3500 Deposits
Deposits at the
Federal Reserve $300
Loans $3000
The required reserve ratio is 10 percent.
1. Find Actual Reserves $ , Required Reserves $ , and Excess Reserves $ .
2. By how much can this bank increase its loans? $
3. What is the money (deposit) multiplier equal to?
4. By how much can the entire banking system expand their loans? $
5. How much new wealth is directly created from this expansion of deposits? $
Explain how each of the following policy actions by the Fed would affect AR, RR, ER, bank lending, and the growth of the money supply:
1. a decrease in the required reserve ratio
AR remain the same ER money multiplier
RR bank lending money supply
2. an increase in the discount rate
AR ER money multiplier
RR bank lending bank lending money supply
3. a Fed's purchase of US government securities from the public
AR remain the same ER remain the same money multiplier increases
RR remain the same bank lending increases money supply increases
Consider the following simplified balance sheet of a commercial bank: ASSETS LIABILITIES Vault cash $200 $3500 Deposits Deposits at the Federal Reserve $300 Loans $3000 The required reserve ratio is 10 percent. 1. Find Actual Reserves $ , Required Reserves $ , and Excess Reserves $ . 2. By how much can this bank increase its loans? $ 3. What is the money (deposit) multiplier equal to? 4. By how much can the entire banking system expand their loans? $ 5. How much new wealth is directly created from this expansion of deposits? $ Explain how each of the following policy actions by the Fed would affect AR, RR, ER, bank lending, and the growth of the money supply: 1. a decrease in the required reserve ratio AR remain the same ER money multiplier RR bank lending money supply 2. an increase in the discount rate AR ER money multiplier RR bank lending bank lending money supply 3. a Fed's purchase of US government securities from the public AR remain the same ER remain the same money multiplier increases RR remain the same bank lending increases money supply increases
Explanation / Answer
1) Actual Reserves = 300
Required Reserves = 3500*10% = 350
Excess Reserves = 350-300 = 50
2) The bank can increase loans by 500, deducting it from reserves as they are in excess than required.
3) Money multiplier = 1/reserve ratio = 1/10% = 10
4) If the entire banking system is maintaining the percentage of reserves, then the entire banking system should epand their loans by (50/300)*100 = 16.66%
=> If required reserve ratio is decreased and actual reserves remains constant, then required resrves decreases and Excess reserves increases.