ECO 2010 INCLUSIVE ACCESS
ECO 2010 INCLUSIVE ACCESS
21st Edition
ISBN: 9781260564624
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
Book Icon
Chapter 35, Problem 6P

Subpart (a):

To determine

Balance sheet.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The required reserves are evaluated as follows:

Required Reserves=Required Reserve Ratio×Checkable deposits                             =0.25×200 billion                             =$50 billion

Hence, the required reserves are $50 billion.

The excess reserves are evaluated as follows:

Excess Reserves=Actual Reserves-Required Reserves                          =$52 billion-$50 billion                          =$2 billion

Hence, the excess reserves are $2 billion.

The maximum amount of a banking system is obtained by taking the product of the monetary multiplier and the amount of excess reserves. Thus, the monetary multiplier can be calculated as follows:

Monetary multiplier=1Required Reserve Ratio                             =10.25                            =4

Hence, the monetary multiplier is 4.

Then, the maximum amount of loans is evaluated as follows:

Maximum amount of loans=4×$2 billion                                         =$8 billion

Hence, the maximum amount of loan is $8 billion.

Table -1 shows the consolidated balance sheet obtained from the given diagram.

Table -1

Assets Liabilities and Net worth
(1) (2)
Reserves $52 $52 Checkable deposits $200 $208
Securities 48 48
Loans 100 108
Economics Concept Introduction

Concept introduction:

Balance sheet: Itis a financial statement that encapsulates an organization’s assets, their liabilities, and equity of the shareholders at a particular point in time.

Subpart (b):

To determine

To determine: Balance sheet.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

The required reserves are evaluated as follows:

Required Reserves=Required Reserve Ratio×Checkable deposits                             =0.20×$200 billion                             =$40 billion

Hence, the required reserves are $40 billion.

The excess reserves are evaluated as follows:

Excess Reserves=Actual Reserves-Required Reserves                          =$52 billion-$40 billion                          =$12 billion

Hence, the excess reserves are $12 billion.

Thus, the monetary multiplier is evaluated as follows:

Money multiplier=1Required Reserve ratio                          =10.2                          =5

Hence, the money multiplier is 5.

Then the maximum amount of loans is evaluated as follows:

Maximum amount of loans=Money multiplier×Excess Reserves                                         =5×$12 billion                                         =$60 billion

Hence, the maximum amount of loans is $60 billion.

Table -2 shows the new consolidated balance sheet obtained from the given diagram.

Table -2

Assets Liabilities and Net worth
(1) (2)
Reserves $52 $52 Checkable deposits $200 $260
Securities 48 48
Loans 100 160

With the required reserve ratio of 20% (rather than 25%), the difference in the amount of the commercial banking system is evaluated as follows:

Difference in the amount that the banking system can lend                                                        =(1st Maximum amount of loan-2nd Maximum amount of loan)                                                         =$60 billion-$8 billion                                                         =$52 billion

Hence, the banking system can lend $52 billion more.

Economics Concept Introduction

Concept introduction:

Balance sheet: Itis a financial statement that encapsulates an organization’s assets, their liabilities, and equity of the shareholders at a particular point in time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Problem 2. If the consumer preference can be represented by a CES function with δ = 0.5, i.e. u(x, y) = x0.5 + y0.5. Let the prices and income be (px, py, w).  1. Set up the Lagrangian expression.2. Take the first-order conditions.3. Substitute into budget constraint to derive the optimal consumption bundles.
1. A town relies on four different sources for its non-drinking water needs: dam water, reclaimed water, rain water, and desalinated water. The different sources carry different risks and costs. For instance, desalinated water is fully reliable due to abundant sea water, but it is more expensive than other options. Reclaimed water also has relatively lower risk than rain or dam water since a certain amount can be obtained, even during the dry. season, by the treatment of daily generated waste water. Using any of the four options requires an investment in that resource. The return on a particular water source is defined as the amount of water generated by the source per dollar of investment in it. The expected returns and standard deviations of those returns for the four water sources are described in the following table: Water resource Expected return St. Deviation Dam water 2.7481 0.2732 Reclaimed water 1.6005 0.0330 Rain water 0.5477 0.2865 Desalinated water 0.3277 0.0000 Higher…
1. Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter." a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend," measured by the increase in butter production? Explain.
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
ECON MACRO
Economics
ISBN:9781337000529
Author:William A. McEachern
Publisher:Cengage Learning
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning