Q1) Use the information in the bank balance sheet below to answer these question

Question

Q1) Use the information in the bank balance sheet below to answer these questions. The required reserve ratio is 0.25, or 25%.

Assets l Liabilities
Reservers $1200 l Deposites $4000

Loans $2800 l

Total $4000 Total $4000

Excess reserves are important to a bank because:
a. Excess reserves are the funds that the bank's customers have in their transactions (checking) accounts

b. Excess reserves pay interest to the bank
c. Excess reserves is another name for the profits of the bank
d. The largest loan a bank can make equals the bank's excess reserves

Q2) The market for money, like all markets, consists of a demand side and a supply side. The demand for money is inversely related to interest rates, which means that as interest rates fall, the opportunity cost of holding money falls and people are willing to hold more of it (everything else held fixed).

We assume here that the supply of money is determined by the Fed and is independent of the interest rate. It is therefore represented graphically as a vertical line.

When the Fed increases the money supply, markte interest rates will:

a. Rise
b. Fall
c. Remain unaffected
d. Fall, leading to an immediate shift in the demand for money.

Explanation / Answer

ANswer 1)

d. The largest loan a bank can make equals the bank's excess reserves

Answer2)

b. Fall

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.