1. Following the balance sheet for The First National Bank (4 points) The First
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Question
1. Following the balance sheet for The First National Bank (4 points)
The First National Bank
1. Following the balance sheet for The First National Bank (4 points)
The First National Bank
Assets Liabilities
Total reserves: ________ Deposits: $500,000
Required reserves: $20,000
Excess reserves: $80,000
Loans: $ 400,000
Total Assets: $500,000 Total liabilities $500,000
a. What is the required reserve ratio? Show your calculation
b. What are the bank’s total reserves? Show your calculation
c. How much can the First National Bank safely lend out? Show your calculation
d. What is the size of the simple money (deposit) multiplier? What does it tell us?
e. By how much will the banking system be able to expand the money supply?
f. If the Fed increases the reserve requirement from your answer to part a to 10 percent, explain verbally and show numerically what will happen to:
· Required reserves,
· Excess reserves,
· The size of the simple money multiplier
· The money supply in the economy
g. “When a bank creates loans, it does not create money” True or false. Explain your answer
h. The Happy Bank receives an extra $1,000 of reserves but decides not to lend any of these reserves out. How much deposit creation takes place for the entire banking system? Explain your answer.
Explanation / Answer
Answer 1
a. Required reserve Ratio is = x % of 500,000 = 20,000
x = 4 per cent
b. Total Reserves = Required Reserves + Excess Reserves
= 20,000 + 80,000 = $100,000
c. The money which can be lent out safely is the amount of the excess reserves of the bank which are $80,000.
d. The size of money multiplier = 1 / Required Reserve ratio = 1 / .04 = 25
This means that if The bank reserves by $1, the money supply in the economy will increase by $25.
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