Suppose that the first commercial bank has received an initial deposit of $5,000. Assume that there is no currency in circulation, while the reserve requirement ratio is set at 10%. a. What is the minimum reserve and the excess reserve of the bank? Show it in a T-account. b. If the first bank holds half of its excess reserve and loan out the other half, show the new T-account of the bank. c. Suppose that the loan from the first bank is deposited by the borrowers in the second bank. If the second bank does not lend the fund, do you think money supply will increase or not? Show the final T-account of both banks and the change in money supply after the loan is made.

Suppose that the first commercial bank has received an initial deposit of $5,000. Assume that there is no currency in circulation, while the reserve requirement ratio is set at 10%. a. What is the minimum reserve and the excess reserve of the bank? Show it in a T-account. b. If the first bank holds half of its excess reserve and loan out the other half, show the new T-account of the bank. c. Suppose that the loan from the first bank is deposited by the borrowers in the second bank. If the second bank does not lend the fund, do you think money supply will increase or not? Show the final T-account of both banks and the change in money supply after the loan is made.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter27: Money And Banking

Section: Chapter Questions

Problem 31P: Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money,...

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Humongous Bank is the only bank in the economy.The people in this economy have $20 million in money,and they deposit all their money in Humongous Bank.a. Humongous Bank decides on a policy of holding100% reserves. Draw a T-account for the bank.b. Humongous Bank is required to hold 5% of itsexisting $20 million as reserves, and to loan outthe rest. Draw a T-account for the bank after ithas made its first round of loans.c. Assume that Humongous bank is part of amultibank system. How much will money supplyincrease with that original $19 million loan?
What are the benefits and costs for a bank when itdecides to increase the amount of its bank capital?
1. You deposit $100 of currency into your account. Explain what happens to reserves , checkabledeposits, and monetary base? 2. Explain what the shadow banking system is and how it works. 3. Your bank has the following balance sheet:Assets LiabilitiesReserves $70 million Checkable deposits $200 millionSecurities $50 millionLoans $130 million Bank capital $50 millionIf the required reserve ratio is 10%, what actions should the bank manager take if there is anunexpected deposit outflow of $50 million? Explain your answer. 4. Explain and demonstrate graphically that if the central bank pursues targeting a monetaryaggregate, it is likely to lose control over the interest rate. 5. In the market for reserves, the federal funds rate is equal to the interest rate paid on excessreserves. Explain and demonstrate graphically the effect of an open market sale on the federalfunds rate.
Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?
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The task I am struggling with: Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. The reserve ratio is 10%. a) how dies the deposit initially change the T-account of the local bank? How does it change the money supply? b) If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit? c) if every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy´s initial cash deposit of $500? Thank you very much for your help.
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