The World’s Best Bank (WBB) is the only bank in the country and its T-account is
ID: 1212483 • Letter: T
Question
The World’s Best Bank (WBB) is the only bank in the country and its T-account is:
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Liabilities (in $ million)
Loans 200
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A) What is WBB’s reserve ratio?
B) What is the implied money multiplier?
C)What is WBB’s leverage ratio?
D)Suppose a foreign depositor withdraws $100 million from his WBB account and transfers the funds to his overseas account. What happens to WBB’s reserve ratio? What happens to the money supply?
E)Going back to the original T-account (i.e. the withdrawal of part d. did NOT take place), Suppose that due to the mortgage crisis some people default on their loans, and their value thus decreases by 50. What happens to the leverage ratio (assuming the bank makes no changes in reserves)?
Assets (in $ million)Liabilities (in $ million)
Reserves 300 Deposits 600Loans 200
Cash held in overseas banks 100 Debt 200 Securities 300 Capital (Owner's Equity) 100Explanation / Answer
The percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank.
Definition: Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank.
Description: The reserve ratio is an important tool of the monetary policy of an economy and plays an essential role in regulating the money supply. When the central bank wants to increase money supply in the economy, it lowers the reserve ratio. As a result, commercial banks have higher funds to disburse as loans, thereby increasing the money supply in an economy.
On the other hand, for controlling inflation, the CRR is generally increased, thereby decreasing the lending power of banks, which in turn reduces the money supply in an economy.
What is the 'Multiplier Effect'
The multiplier effect is the expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.
What is a 'Leverage Ratio'
Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.
The reserve ratio gets decreased.
The lecerage rayio also gets decreased
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