PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 4RQ
To determine
Explain what is banking panic.
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One of the major functions of commercial banks is credit creation. Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. Commercial banks have to maintain a specified percentage of their deposits as liquidity which is set by the central bank. This reserve requirement controls the extent to which commercial banks can grow money in the economy. Assuming you only have one commercial bank in your economy, a reserve requirement of 20% and an initial deposit of 200.
REQUIRED: A. Show for the first four days and the last day the balance sheet of your commercial bank.
Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. (LG 4-3)
If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.
Redo part (a) using a 12 percent reserve requirement.
As part of its efforts to restore confidence in the banking and specialized deposit-taking sectors, the Bank of Ghana embarked on a clean-up exercise in August 2017 to resolve insolvent financial institutions whose continued existence were thought to pose risks to the interest of depositors. In 2019, the Bank of Ghana released a statement saying it had completed its clean-up exercise of the banking and specialized deposit-taking (SDI), and non-banking financial institutions (NBFI) sectors.As a student of Financial Markets and Institutions, provide reasons for or against the cleanup exercise embarked upon by the Central Bank.
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PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- One effect of the September 11, 2001, terrorist attacks was to temporarily prevent banks from accessing reserves they needed to meet the demands of their customers. (This occurred because the attacks destroyed many records as well as the computers required to access backup records, and it took affected banks several weeks to become fully operational.) In response, the Fed made many billions of dollars of reserves available to banks, gradually withdrawing the new reserves from the banking system as that system returned to normal. Suppose the Fed had not injected reserves in this way. What would likely have happened to interest rates as a result? What would have been the likely impact on the stock market and on spending by consumers and businesses? Would the unemployment rate have gone up or down? Explain your reasoning in each case.arrow_forwardBank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.arrow_forwardDiscuss the role and function of any large financial institution in St.Lucia as well as THREE impacts that intuition has on the economy of St.Lucia. Any financial institution excluding the Central Bank.arrow_forward
- Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Felix, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Now, suppose First Main Street Bank loans out all of its new excess reserves to Deborah, who immediately writes a check for the full amount to Carlos. Carlos then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Larry, who writes a check to Janet, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Megan. Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,800,000 injection…arrow_forwardLeniency Bank wishes to cater to the demands of the residents of Prudence Island, a savings-minded clientele with an unusual appetite for government securities. To this end, Leniency Bank is planning to purchase a large amount of government bonds, which later will be offered to its account holders. The bonds are purchased with the reserves of the bank. The balance sheet describes the bank's current financial situation in millions of dollars. Suppose that the required reserve ratio set by the Fed is 10%. What is the largest government securities purchase Leniency Bank could make before it becomes fully loaned up? Assets cash: $19 reserves: $50 loans; $100 securities: $24 property: $83 Balance sheet: Leniency Bank Liabilities checkable deposits: $230 stock shares: $46 largest government securities purchase: $ million.arrow_forwarduppose an individual deposits $4,000 into her chequing account, which eventually leads banks to increase cash reserves of $4,000 and initiates $46,000 in additional loans. The target reserve ratio is [blank1]%. Suppose an individual makes a new deposit of $15,250. If the targeted reserve ratio is 12.5%, calculate the value of new loans generated in the economy.arrow_forward
- FRONT PAGE ECONOMICS The FTX Collapse In a mere 10 days, $32 billion vanished into thin air. That was the market value on November 8, 2022, of the cryptocurrency exchange company called FTX. FTX had an exchange platform that handled customer purchases and sales of cryptocurrencies, including its own FTT. Like Bitcoin, FTT was a cryptocurrency that could be used to transfer money, make purchases, or be held as wealth. Or so people thought. In reality, a lot of money deposited into FTX customer accounts was being diverted into the personal accounts of the company's owner and key associates. When customers wanted to withdraw their deposits, the cupboard was bare. On November 11, 2022, FTX filed for bankruptcy. The price of an FTT token fell from $24 on November 8 to $1.27 on November 23. Thousands of FTX customers and investors lost millions of dollars, including celebrities like Tom Brady, Steph Curry, and Naomi Osaka. The University of California football team and the Miami Heat also…arrow_forwardWhich of the following is true about Central Bank Digital Currencies (CBDCs)? Central Bank Digital Currencies are always built on the Ethereum network. Central Bank Digital Currencies are always centralized and never exist on another blockchain network. Central Bank Digital Currencies are not being developed to any real degree outside of a few small countries. There are several competing approaches to Central Bank Digital Currencies including centralizations, decentralization, and building CBDCs on another blockchain.arrow_forwardWhich of the following is true about Central Bank Digital Currencies (CBDCs)? Central Bank Digital Currencies are always built on the Ethereum network. Central Bank Digital Currencies are always centralized and never exist on another blockchain network. Central Bank Digital Currencies are not being developed to any real degree outside of a few small countries. There are several competing approaches to Central Bank Digital Currencies including centralizations, decentralization, and building CBDCs on another blockchain. Answer correctly and explain it properly within 40mins will give you positive feedback.arrow_forward
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