ESSENTIALS CORPORATE FINANCE + CNCT A.
ESSENTIALS CORPORATE FINANCE + CNCT A.
9th Edition
ISBN: 9781259968723
Author: Ross
Publisher: MCG CUSTOM
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Chapter 16.3, Problem 16.3ACQ
Summary Introduction

To discuss: The factors that determines the most favorable size’s of investment in current assets of the firm.

Introduction:

The firm adopts various short-term financial policies that measures the part of short term and long-term debt used in current assets.

  • Restrictive shorter financial policy is the high portion of short-term debt comparatively to long term debt.
  • Flexible policy is the low portion of short term debt comparatively to long term debt.

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National Bank currently has $500 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 75 percent of its excess reserves to loans and borrowers return 60 percent of these funds to National Bank as transaction deposits.
The FOMC has instructed the FRBNY Trading Desk to purchase $500 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 95 percent of these funds to their banks in the form of transaction deposits?
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ESSENTIALS CORPORATE FINANCE + CNCT A.

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