19. (6 points) Federal Reserve millions S Loans to Banks Securities Gold and for
ID: 1105245 • Letter: 1
Question
19. (6 points) Federal Reserve millions S Loans to Banks Securities Gold and foreign exchange Assets Liabilities $50,000Currency in circulation $1,300,000 $3,900,000Bank Reserves $2,800,000 $18,000 $200,000 Other a. (1 pt) Calculate the monetary base. Suppose banks are required to keep 10% of deposits in reserve. Cascade Bank millions Assets Liabilities Deposits at Fed $11,000 Checkable Deposits $110,000 Required Reserves Excess Reserves Loans $70,000 Securitie:s $33,000 b. (2 pts) Suppose the Federal Reserve purchases $2000 mlion in securities from Cascade bank. Show this on the Federal Reserve balance sheet and Cascade's balance sheet c. (1 pt) What happened to the monetary base as a result of of the open market purchase!? d. (2 pts)If excess reserves are loaned out and the lending continues to the last penny, what is the maximum possible expansion of the money supply?Explanation / Answer
Answer a : Monetary base = currency in circulation +Bank reserve
Monetary base = 1,300,000+2,800,000 = 41,00,000
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Answer b : Balance sheet of Federal reserve
Assets Amount Liabilities Amount
Loans to Bank 50,000 Currency at circulation 1,300,000
Securities 39,02,000 Bank reserve 28,02,000
Balance sheet of Cascade limited
Assets Amt Liabilities Amt
Deposits at fed 11,200 Checkable deposits 112000
Loans 70,000
Securities 31000 ---------------------------------------------------------------------------------------------------------------------------------------------
Answer c : Monetary base of federal reserve = 1,300,000+2802000 = 41,02,000
Monetary base of bank = M/ m
m = 1/reserve ratio = 1/ 0.10 = 10
Monetary base = 112000/10 = 11,200
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Answer d : Maximum loan amount given by Casche bank = 1,12,000 - 11,200 = $ 1,00,800
The maximum possible exppansion of loan is $1800 million.
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