Question

Initially, the Republic of Gorgonzola has no commerclal banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 5,000,000 identical paper notes, called guifders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 5,000,000 million guilders In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can elther withdraw their guilders or write a check on their accournt. Checks give the banks pemission to transfer guiders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank. Deposits do not earn interest in this economy Let's suppose for now that people prefer bank deposits to cash and so deposit all of their guilders with the commnercial banks. Assume that () initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation and (2) commercial banks desire to hold reserves of 20 percent of deposits. Assume that the public holds no currency Instructions: Enter your responses as whole numbers a The consolidated balance sheet of Gorgonzolan commercial banks after the initial deposits is Initial balance sheet Assets Liabilities Currency Deposits b. The consolidated balance sheet of Gorgonzolan commercial banks after one round of loanss is Balance sheet after first round of loans Assets Liabilities Currency (- reserves) Deposits Loans c The consolidated balance sheet of Gorgonzolan commercial banks after the first redeposit of guilders is Balance sheet after redeposits Assets Liabilities Currency ( reserves) Deposits Loans d. The cormsolidated balance sheet of Gorgonzolan commerclal banks after two rounds of loans and redeposits s Bnienca rho08 aLL

Answer 1

Initially,the republic of gorgonzola has no commercial banking system .
a Represent the initial balance sheet as follows: Assets Liabilities Deposits Currency 5,000,000 5,000,000 calculate the reserves and loans as follows: Reserves = % of deposits x money supply - 20-4- X 5.000.000 20.20 X 5,000,000 - $1,000,000 Loans - Money Supply - Reserves >5,000,000 -1,000,000 $44,000 000 Thus the reserves are $1,000,000 and loan is $4,000,000 Represent the balance sheet after first round of loans ass follows: Asset Currency reserves loans Ciabilities Deposits 1,000,000 5,000,000 4/000,000

c) calculate the reserves and deposits after redepasit as following Reserves Reserves after first round of loans + loans - 1,000,000 +4,000,000 2 $5,000,000 Deposits Reserves + loans • 5,000,000 -4,000,000 = $9000,000 Represent the balance sheet after first red eposits" as follows Asset Reserves liabilities Deposit 5.000.000 9,000,000 loans 447000,000 9 Represent the balance sheet after second round of loans and redeposits as follows: Asset Currency (Reserves) loans Liabilities Deposit 5,000,000 191200,000 19,000,000-43209000) 7,200,000 calculate the loan amount as follows:

Loan 4000,000 + 4,000,000 - 8,00000) = 4,000,000 +3,200,000 $ 7,200.000 the loan amount is Thus $7,200,000. Represent the final consolidated balance sheet as follows: liabilities Deposits 25,000,000 Assets Currency Strol Value of bank reme) loans 5.000.000 125,000,000 x0n) 20,000,000 calculate the value of money supply as follows; Money supply - Xintial money supply. Reserve requirement N 5,000,000 0.2 25X5,000,000 225,000,000 guilders. Thus the money supply is 25,000,000 guilders