Question Set 5 Assume the required reserve ratio at Texas Central is 10%. Texas
ID: 1103477 • Letter: Q
Question
Question Set 5
Assume the required reserve ratio at Texas Central is 10%. Texas Central is a primary dealer, which means that it is a financial institution that is able to buy and sell securities directly to the U.S. Federal Reserve (Fed). Remember any bank in the U.S. can borrow from the Fed.
Provided below is the balance sheet for Texas Central:
Type of Asset
Asset Amount
Type of Liability
Bank Capital
Reserves
$50,000
Checkable Deposits
$200,000
Loans
$120,000
Savings Deposits
$100,000
Securities
$150,000
Bank Capital
$20,000
Use the information as well as the balance sheet for Texas Central provided above to complete and answer the following:
What is the amount of excess reserves held by Texas Central?
The Fed buys $50,000 of securities from Texas Central and pays for those securities by increasing Texas Central’s bank deposits at the Fed. Show the effect of this transaction on Texas Central’s balance sheet.
When completing this part of your answer, remember that reserves equal bank deposits held at the Fed, plus vault cash.
What happens to excess reserves when the Fed buys securities from Texas Central?
What happens to the amount of loans Texas Central can create after the Fed buys securities? What will happen to the money supply if Texas Central makes additional loans?
Go back to the original balance sheet. Suppose Texas Central borrows $25,000 from the Fed. Show the effect of that transaction on Texas Central's balance sheet.
What happens to excess reserves at Texas Central after the discount loan? What will happen to the money supply?
What happens to the amount of loans Texas Central can create after the discount loan?
Go back to the original balance sheet. The Fed has a new tool that can pay interest on reserves held at the Fed. If the interest rate on reserves increases, will Texas Central be more- or less-likely to hold excess reserves? What will happen to the amount of loans Texas Central will make if the interest rate on reserves increases? What will happen to the money supply?
The Fed is currently using three tools: open market operations, interest rate on reserves, and forward guidance. Define each tool and explain how the Fed uses that tool to increase and decrease the money supply.
Type of Asset
Asset Amount
Type of Liability
Bank Capital
Reserves
$50,000
Checkable Deposits
$200,000
Loans
$120,000
Savings Deposits
$100,000
Securities
$150,000
Bank Capital
$20,000
Explanation / Answer
Answer : Amount of excess reserve hold by Texas Centeral Bank is
Reserve ratio =10%
Actual reserve =$50,000
Required reserve = Total deposits *Reserve ratio
Required reserve = $3,00,000*10/100 = $30,000
Excess reserve = $50,000- $30,000 = $20,000
----------------------------------------------------------------------------------------------------------------------------------------------------------
Answer : New Balance Sheet
Assets Amount Liabilities Amount
Reserves $50,000 Checkable deposits $2,50,000
Loan $2,20,000 Savings deposits $1,00,000
Securities $1,00,000 Bank capital $20,000
------------------ -------------
$3,70,000 $3,70,000
Excess reserve has been decreased as required reserve has been increased in the Texas centeral bank. The Texas centeral bank required reserve = 3,50,000*10/100 = $35000
Excess reserve = Actual reserve - Required reserve = $50,000- $35000 = $15000
Amount of loan texas bank has been increased by $2,20,000 (New loan amount )
The money supply has been increased in an economy because there is more money flow in the market by Texa centeral economy.
-------------------------------------------------------------------------------------------------------------------------------------------------------
Answer : Excess reserve after discounting loan is $20,000. But the money supply has been increased by $25000.
The amount of loan has been increased by $25000.Now the new loan amount is $1,45,000.
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Answer : If the interest rate on reserve has been increased than they are most likely to put excess money in reserve otherwise if interest rate on reserve is below the loan interest rate than they withdraw excess reserve . The money supply has been decreased if interest rate on reserve start increasing because now bank thinks it is most profitable to put money in reserve.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.