1. Suppose that I make a deposit of $10,000 into NBD. Assume the minimum require

Question

1. Suppose that I make a deposit of $10,000 into NBD. Assume the minimum required

reserve ratio set by the Fed is .125.

a. Fill in the balance sheet below assuming that NBD does not loan out any of the

new deposit

If NBD wishes to have a reserve ratio of 30%, how much

should it lend out? ______________

c. What is the maximum amount that NBD can lend out without

violating its required reserve ratio? _______________

d. Fill in NBD's balance sheet after it has lent out the amount you listed in b.

e. Suppose that the borrower keeps the cash. What is the

money supply? _______________

f. Suppose that the borrower deposits the amount listed in b in Citizen's Bank. Fill

in Citizen's Bank's balance sheet before it makes any loans.

g. How much will Citizen's Bank's lend out if its reserve ratio

is .3? ______________

h. What is the reserve ratio for the banking system after Citizen's

Bank receives the deposit but before it makes any loans? ______________

i. Suppose that Citizen's Bank lends out the amount you listed

in g and that the dollars loaned are deposited into a third bank.

What is the system-wide reserve ratio before the third bank

makes any loans? _____________

j. Using your figures from question 1, and assuming that the public holds no currency

and that all of the banks wish to have a reserve ratio of .3, what are the

long-run values of

Money supply ______________

Reserves ______________

k. Again, use your figures from question 2, and assumed that the public holds no

currency. But now, all of the banks wish to have a reserve ratio of .125. What are the

long-run values of

Money supply _____________

Reserves _____________

Explanation / Answer

(a)

If NBD does not loan out any of the new deposit it will keeping the entire deposit of $10,000 as reseves. With no excess reserves left it will not be able to lend so, loan will be zero.

ASSETS LIABILITIES

TR $10,000 DD $10,000

LOANS $0

(b)

If NBD wishes to have a reserve ratio of 30% then it will keep 30% of the new deposit as reseve and lend out the remaining balance.

Total Reseve =10,000*.3=$3,000

Loan= 10,000-3,000=$7,000

So, NBD should lend out $7,000

(c)

The required reserve ratio set by Fed is equal to .125

Required Reserve of NBD=10,000*.125=$1250

The maximum amount Fed can lend without without violating its required reserve ratio =10,000-1250=$8750

(d)

ASSETS LIABILITIES

TR $3,000 DD $10,000

LOANS $7,000

(e)

Money supply=Demand Deposits + loans

=10,000+7000=$17,000

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