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MGEA06H3 Lecture Notes - Excess Reserves, Demand Deposit, Reserve Requirement

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bluetiger347
16 Jun 2013
School
UTSC
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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Desired reserves = reserve ratio (rr) demand deposits (dd) Excess reserves = actual reserves held by chartered bank desired reserves. Excess reserves = - = : the chartered bank holds excess reserves of . Suppose the chartered bank keeps the level of excess reserves constant at and the central bank purchases of government bonds from the public (we called this open market purchase): Loans + ( ) = . Equity : the chartered bank"s reserves increases by , loans made by the chartered bank rises by , demand deposits increases by , money supply increases by , as demand deposits increases by . Fyi: how ms increases: when the central bank purchases of government bonds form the public, those who sell the bonds to the central bank will receive cheques form the central bank (a total amount of.

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Related Questions

Balance Sheet for Princeton Bank(amount in millions of dollars)
Assets---------------------Liabilities+capital
Reserve 30--------------Transactions 300
Securities 140-----------Deposit 0
Loans 280---------------Nontransacations 140
Total assets 450---------Deposits
Capital
Total liabilities+ Capital 450
Of Princeton Bank's reserves, $6million 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 nontransaction deposits to transaction deposits
N/D=2.0=ratio of non-transaction deposits to transaction deposits, MMF/D=1.6=ratio of retail money-market mutual funds to transaction deposits, Q=0.08=8%=required reserve ratio on transaction deposits=RR/D=ratio of the required reserve to transaction deposits, RCB/D=0.02=2%=ratio of required clearing balances to transaction deposits

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 transaction deposit to 0.18=18%. What happens to Princeton Bank's balance Sheet? Does it has 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 Princeton Bank. What happens to Princeton Bank's balance sheet? Does it have an excess reserve, or is it short of reserves? Calculate the new M1, M2,N,D,C,MMF,RCB, and R?
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7. (Question 7 has two parts)
Part 1 of Question 7 (10 points)
Below is the Balance Sheet for the Bank of Upland as of October 1, 2007. The required reserve ratio is 2%. Using this information and the Balance Sheet below answer the following questions.
Bank of Upland
Assets Liabilities
$50 million Vault Cash $300 million Demand Deposits
$130 million Treasury Bonds
$45 million Car Loans
$10 million Business Loans
$30 million Credit Card Loans
$10 million On Deposit at the Fed
$25 million in Mortgages

$300 million Total Assets $300 million Total Liabilities


(a) Calculate the Bank of Upland’s Total Reserves as of October 1, 2007 (please show/explain how you got your answer).

b) Calculate the Bank of Upland’s Required Reserves as of October 1, 2007 (please show/explain how you got your answer).


c) Calculate the Bank of Upland’s Excess Reserves as of October 1, 2007 (please show/explain how you got your answer).

d) Determine the amount of Bank of Upland’s Total Reserves which can legally be loaned out as of October 1, 2007 (please show/explain how you got your answer).


e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 1, 2007 (please show/explain how you got your answer).




Part 2 of Question 7 (15 points)

Start with the same Balance Sheet and required reserve ratio found in Part 1 above, and using the fact that the Federal Reserve had just sold $50 million worth of Treasury Bonds (T-bonds) to the Bank of Upland at the end of business on October 1, 2007 (no other transaction occurred at the Bank of Upland on October 1, 2007), answer the following questions.

a) Fill in the Bank of Upland’s Balance Sheet numbers as of the start of business on October 2, 2007 for the categories found below. Start with the numbers in Part 1 above and incorporate the fact that the Federal Reserve (using Open Market Operations) had just sold $50 million worth of Treasury Bonds (T-bonds) to the Bank of Upland. Using a Word Table might help.

Bank of Upland
Vault Cash Demand Deposits
Treasury Bonds
Car Loans
Business Loans
Credit Card Loans
On Deposit at the Fed
in Mortgages

Total Assets Total Liabilities


b) Calculate the Bank of Upland’s Total Reserves as of October 2, 2007 (please show/explain how you got your answer).

c) Calculate the Bank of Upland’s Required Reserves as of October 2, 2007 (please show/explain how you got your answer).

d) Calculate the Bank of Upland’s Excess Reserves as of October 2, 2007 (please show/explain how you got your answer).



e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 2, 2007 (please show/explain how you got your answer).


f) Explain the reason the Federal Reserve would BUY these T-bonds from the Bank of Upland and explain what the Federal Reserve is worried about. (In other words, what economic condition is the Fed trying to avoid and how would the bond purchase help the Fed to avoid this economic condition.) You must use numbers to support your answer to receive credit.

g) Explain how the Fed would use two other monetary tools to help support its Open Market Purchase above. Explain how these tools would be used and how they would have an impact on the Marcoeconomy.


7. (Question 7 has two parts)
Part 1 of Question 7 (10 points)
Below is the Balance Sheet for the Bank of Upland as of October 1, 2007. The required reserve ratio is 2%. Using this information and the Balance Sheet below answer the following questions.
Bank of Upland
Assets Liabilities
$50 million Vault Cash $300 million Demand Deposits
$130 million Treasury Bonds
$45 million Car Loans
$10 million Business Loans
$30 million Credit Card Loans
$10 million On Deposit at the Fed
$25 million in Mortgages

$300 million Total Assets $300 million Total Liabilities


(a) Calculate the Bank of Upland’s Total Reserves as of October 1, 2007 (please show/explain how you got your answer).

b) Calculate the Bank of Upland’s Required Reserves as of October 1, 2007 (please show/explain how you got your answer).


c) Calculate the Bank of Upland’s Excess Reserves as of October 1, 2007 (please show/explain how you got your answer).

d) Determine the amount of Bank of Upland’s Total Reserves which can legally be loaned out as of October 1, 2007 (please show/explain how you got your answer).


e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 1, 2007 (please show/explain how you got your answer).




Part 2 of Question 7 (15 points)

Start with the same Balance Sheet and required reserve ratio found in Part 1 above, and using the fact that the Federal Reserve had just sold $50 million worth of Treasury Bonds (T-bonds) to the Bank of Upland at the end of business on October 1, 2007 (no other transaction occurred at the Bank of Upland on October 1, 2007), answer the following questions.

a) Fill in the Bank of Upland’s Balance Sheet numbers as of the start of business on October 2, 2007 for the categories found below. Start with the numbers in Part 1 above and incorporate the fact that the Federal Reserve (using Open Market Operations) had just sold $50 million worth of Treasury Bonds (T-bonds) to the Bank of Upland. Using a Word Table might help.

Bank of Upland
Vault Cash Demand Deposits
Treasury Bonds
Car Loans
Business Loans
Credit Card Loans
On Deposit at the Fed
in Mortgages

Total Assets Total Liabilities


b) Calculate the Bank of Upland’s Total Reserves as of October 2, 2007 (please show/explain how you got your answer).

c) Calculate the Bank of Upland’s Required Reserves as of October 2, 2007 (please show/explain how you got your answer).

d) Calculate the Bank of Upland’s Excess Reserves as of October 2, 2007 (please show/explain how you got your answer).



e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 2, 2007 (please show/explain how you got your answer).


f) Explain the reason the Federal Reserve would BUY these T-bonds from the Bank of Upland and explain what the Federal Reserve is worried about. (In other words, what economic condition is the Fed trying to avoid and how would the bond purchase help the Fed to avoid this economic condition.) You must use numbers to support your answer to receive credit.

g) Explain how the Fed would use two other monetary tools to help support its Open Market Purchase above. Explain how these tools would be used and how they would have an impact on the Marcoeconomy.