PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 6P
To determine
Determine which of the given statement is false about the Fed.
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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. 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.
Leniency 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.
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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