Suppose that Big Bucks Bank has the simplified balance sheet shown below. The re
ID: 1202401 • Letter: S
Question
Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent.
a. What is the maximum amount of new loans that Big Bucks Bank can make? $.
Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount.
b. By how much has the supply of money changed? $.
c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'.
d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make? $.
Show in columns 3 and 3' (below) how the bank’s balance sheet will appear after the bank has lent this additional amount.
By how much has the supply of money changed? $.
How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.
Reserves
$22,000
$
$ Checkable deposits
$100,000 $ $
Securities
38,000
Loans
40,000
Explanation / Answer
Reqired Reserve = 0.20*100,000 = $20,000
a. The maximum amount of new loans that Big Bucks Bank can make = Actual Reserve - Required Reserve
= $22,000 - $20,000 = $2,000
b. Money Multiplier = 1/Required Reserve = 1/.20 = 5
Change in Money Supply = Money Multiplier*Change in Reserve = 5*2000 = $10,000
D.
i.
Reqired Reserve = 0.15*100,000 = $15,000
The maximum amount of new loans that Big Bucks Bank can make = Actual Reserve - Required Reserve
= $22,000 - $15,000 = $7,000
Money Multiplier = 1/Required Reserve = 1/.15 = 6.66
Change in Money Supply = Money Multiplier*Change in Reserve = 6.66*7000 = $46,666
Assets Liabilities and net worth (1) (2) (1' ) (2' )Reserves
$22,000
$20,000
$22,000 Checkable deposits
$100,000 $100,000 $102,000
Securities
38,000
38,000
38,000
Loans
40,000
42,000
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