The amount that the bank should lend, assuming that it holds no excess reserves .

Question

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Answer 1

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Students have asked these similar questions

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Suppose there are two firms 1 and 2, whose abatement costs are given by c₁ (e₁) and C2 (е2), where e denotes emissions and subscripts denote the firm. We assume that c{(e) 0 for i = 1,2 and for any level of emission e we have c₁'(e) # c₂' (e). Furthermore, assume the two firms make different contributions towards pollution concentration in a nearby river captured by the transfer coefficients ε₁ and 2 such that for any level of emission e we have C₂'(e) # The regulator does not know the resulting C₁'(e) Τι environmental damages. Using an analytical approach explain carefully how the regulator may limit the concentration of pollution using (i) a Pigouvian tax scheme and (ii) uniform emissions standards. Discuss the cost-effectiveness of both approaches to control pollution.

Answer 2

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Answer 3

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Answer 5

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 6

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 7

Chapter 14, Problem 3.4P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Answer 8

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Answer 9

Sub-part

A

Expert Solution

Answer 10

Sub-part

A

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 13

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 14

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Answer 15

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Answer 16

Sub-Part

B

Expert Solution

Answer 17

Sub-Part

B

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 20

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 21

Sub-Part

C

To determine

The same process for banks C, D and E.

Answer 22

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Answer 23

Sub-Part

C

Expert Solution

Answer 24

Sub-Part

C

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 27

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 28

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Answer 29

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Answer 30

Sub-Part

D

Expert Solution

Answer 31

Sub-Part

D

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 34

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 35

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Answer 36

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Answer 37

Sub-Part

E

Expert Solution

Answer 38

Sub-Part

E

Expert Solution

Answer 39

Expert Solution

Answer 40

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.