Homework Answers
(A)
| Assets | Amount | Liability | Amount |
| reserve 25% of deposit | 3000 | deposit | 12000 |
| Security | 3000 | equity | 3000 |
| Loan | 9000 | ||
| 15000 | 15000 |
(B) Total Amount of reserve is = 12000*25% = 3000.
(C) Total Amount of Loan is = 12000-3000=9000 . bank has to keep legal reserve of amount 3000. rest 9000 can be given as loan to borrower.
(D) leverage ratio
= Tier 1 capital defined as common equity, retained earnings, reserves, and certain instruments with discretionary dividends and no maturity.
= equity + retained earning + reserves+ certain instruments with discretionary dividends
= 3000+3000=6000
total consolidated assets= 15000
= Tier 1 Capital / Total Consolidated Assets) ×100
= (6000/ 15000) *100
= 40%
(E) if we only consider $500 then total money creation will be as follows
credit multiplier= 1 / legal reserve ratio =
=1/ 25 %
=4
total money creation= 500*4= $2000
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