Refer to the following balance sheet of a banking system: Suppose the required reserve ratio is 20% and the public does not initially hold any cash. Assets ($ million) Reserves Loans 500 1,000 i. Liabilities ($ million) Deposits 1,500 a. Calculate the changes in deposits, money supply and loans after the money expansion or contraction process as a result of each of the following independent events. Winnie receives a $100 million remittance from her relative overseas. She deposits the amount into the banking system. ii. Some depositors withdraw $300 million from their deposits and hold it as cash. b. To derive your answer in part (a), what are the THREE assumptions behind it?

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Refer to the following balance sheet of a banking system: Suppose the required reserve ratio
is 20% and the public does not initially hold any cash.
Assets (5 million)
Reserves
Loans
500
1,000
i.
Liabilities ($ million)
Deposits
1,500
a. Calculate the changes in deposits, money supply and loans after the money expansion or
contraction process as a result of each of the following independent events.
Winnie receives a $100 million remittance from her relative overseas. She deposits the
amount into the banking system.
ii. Some depositors withdraw $300 million from their deposits and hold it as cash.
b. To derive your answer in part (a), what are the THREE assumptions behind it?
Transcribed Image Text:Refer to the following balance sheet of a banking system: Suppose the required reserve ratio is 20% and the public does not initially hold any cash. Assets (5 million) Reserves Loans 500 1,000 i. Liabilities ($ million) Deposits 1,500 a. Calculate the changes in deposits, money supply and loans after the money expansion or contraction process as a result of each of the following independent events. Winnie receives a $100 million remittance from her relative overseas. She deposits the amount into the banking system. ii. Some depositors withdraw $300 million from their deposits and hold it as cash. b. To derive your answer in part (a), what are the THREE assumptions behind it?
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