Question

Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves Assets (in Billions) Liabilities (in Billions) Total reserves $ 30 Transactions account 190 deposits 180 400 Loans Total assets 400 Total liabilities 400 Instructions: In part a, enter your response as a percentage rounded to one decimal place. For all other parts, enter your responses as a whole number a. What is the reserve requirement? b. Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity Assets (in Billions) Liabilities (in Billions) Total reserves ransactions account deposits Loans Total assets Total liabilities c. By how much has the money supply changed as a result of the lower reserve requirement (step b)? billion d. Now suppose the Fed buys $10 billion of securities directly from the banks. What will the banks' books look like immediately after this purchase but before the banks make any additional loans? Assets (in Billions) Liabilities (in Billions) Transactions account deposits Total reserves Securities Loans Total assets Total liabilities e. How much excess reserves do the banks have now? billion f. By how much can the money supply now increase? billion

Answer 1

Banking System a.To calculate the reserve requirement, use the following formula: The reserve requirement ratio is calculated as: Reserve Ratio (Total Reserves/Total Deposits) -30/400 -0.075 - 7.5% Thus, the reserve requirement is 7.5% b,Suppose the reserve requirement changed to 5%. The following table reflects the banking system's new balance sheet after fully utilizing its lending capacity Assets (in Billions) Total reserves (5% of $400) Securities Loans (180+30-20) Total Liabilities (in Billions) 20 190 Transactions accounts 400 190 400 The total amount of assets and liabilities do not change with a change in the reserve requirement. The amounts of securities and transactions accounts are also unaffected

c. The money multiplier indicates the amount of loans that the banking system can create from $1 of excess reserves. This multiplier is calculated as: Money Multiplier-1/0.05 20 The money multiplier is equal to 20 when the required reserve ratio is 0.05 The change in the money supply is calculated as: Change in Money Supply (change in reserves) x (Money Multiplier) Thus, change in money supply 20(Change in reserves) d. Suppose the Fed buys $10 billion of securities directly from the banking system. The following table reflects the banking system's new balance sheet after this purchase by the Fed Assets (in Billions) Total reserves (5% of $400) Excess reserves Securities (190-10) Loans Total Liabilities (in Billions) 20 10 180 Transactions accounts 190 400 400 400 The amount of securities decreases from $190 billion to $180 billion because the Fed purchased $10 billion's worth of securities from the banking system, increasing excess reserves by the same amount. e. The banks create an excess reserves equal to the amount of securities it sold i.e. $10 billion f. Recall from part (c) that the change in the money supply is calculated as: Change in Money Supply (change in reserves) x (Money Multiplier) - $10 x 5 $50 billion Thus, total money supply increases by $50 billion

Answer 2

Well I don't know what's  going on, the answer looker strange