CAS EC 102 Lecture 24: macro lecture 24

APPLICATION

Suppose that the reserve requirement is 10% on all deposits and the balance sheet of People’s National Bank looks like the following (in billions):

Assets

Vault Cash $555

Reserves at the Fed $545

Loans Outstanding $657

Securities $1100

Buildings & Equipment $1400

Other Assets $2115

Liabilities

Demand Deposits $545

Savings Deposits $7245

Time Deposits $2210

Other Liabilities $785

Net Worth ??

What is the “Net Worth” of the bank?

2. What is the dollar value of required reserves for People’s National Bank?

3. Does the bank have any excess reserves?

4. What is the maximum amount of new loans the bank can extend?

5. Indicate how the bank’s balance sheet would be altered if it made these new loans.

6. Suppose that the required reserves were 20 percent; if this were the case, would the bank be in a position to extend any additional loans? Would it satisfy the reserve requirement?

2. Imaging the FED engages in an open market sale of $25 million; using a balance sheet for both the bank and the FED, illustrate the changes.

3. If an individual moves $500 from their checking to their savings, how will this affect M), M1, M2, and M3? What about moving funds from savings to checking?

Consider the following simplified balance sheet of a commercial bank:

ASSETS  and LIABILITIES

Vault cash $200 

Deposits $3500

Deposits at the Federal Reserve $300

Loans $3000

1.The required reserve ratio is 10 percent.

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?

QUESTION 1

Refer to this scenario for all of the questions on this problem set.

The balance sheet of the only bank in a simple economy is shown below. The reserve requirement is 10%. If cash in the hands of the non-bank public is $3,000, the Money Supply = ___________________.

QUESTION 2

Suppose people deposit $1,000 of their cash into checking accounts. In the balance sheet below, enter the new totals in all of the accounts, immediately following the transaction, before the bank does any new lending.

QUESTION 3

Recall that cash in the hands of the non-bank public was initially equal to $3,000. Thus, immediately following the $1,000 deposit, currency in the hands of the non-bank public = _____________

QUESTION 4

And Deposits = ______________