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    Reserve Requirement/Deposit Expansion AND BANK BALANCE SHEET PRACTICE Questions - Show Your Work and Answer in The Space Provided

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    Ringle Job
    This document provides examples and explanations of bank balance sheets and how reserve requirements and the money multiplier affect the money supply. It defines key terms like required reserves, excess reserves, and actual reserves. It then walks through examples of how transactions like deposits, withdrawals, and loan repayments impact a bank's balance sheet and the money supply. The money multiplier formula is also explained as the mechanism by which the banking system can expand the money supply through lending.

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    Reserve Requirement/Deposit Expansion AND BANK BALANCE SHEET PRACTICE Questions - Show Your Work and Answer in The Space Provided

    Uploaded by

    Ringle Job
    367 views6 pages
    This document provides examples and explanations of bank balance sheets and how reserve requirements and the money multiplier affect the money supply. It defines key terms like required reserves, excess reserves, and actual reserves. It then walks through examples of how transactions like deposits, withdrawals, and loan repayments impact a bank's balance sheet and the money supply. The money multiplier formula is also explained as the mechanism by which the banking system can expand the money supply through lending.

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    This document provides examples and explanations of bank balance sheets and how reserve requirements and the money multiplier affect the money supply. It defines key terms like required reserves, excess reserves, and actual reserves. It then walks through examples of how transactions like deposits, withdrawals, and loan repayments impact a bank's balance sheet and the money supply. The money multiplier formula is also explained as the mechanism by which the banking system can expand the money supply through lending.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    367 views6 pages

    Reserve Requirement/Deposit Expansion AND BANK BALANCE SHEET PRACTICE Questions - Show Your Work and Answer in The Space Provided

    Uploaded by

    Ringle Job
    This document provides examples and explanations of bank balance sheets and how reserve requirements and the money multiplier affect the money supply. It defines key terms like required reserves, excess reserves, and actual reserves. It then walks through examples of how transactions like deposits, withdrawals, and loan repayments impact a bank's balance sheet and the money supply. The money multiplier formula is also explained as the mechanism by which the banking system can expand the money supply through lending.

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    © All Rights Reserved
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    of 6

    Reserve Requirement/Deposit Expansion AND BANK

    BALANCE SHEET PRACTICE Questions - Show your work


    and answer in the space provided
    1. What are required reserves? Excess Reserves? How do you calculate total or
    actual reserves?

    Required Reserves = Checkable deposits banks may not lend out.


    Excess Reserves = Checkable deposits banks may lend out.
    Actual Reserves = Required Reserves + Excess Reserves.

    2. What is the Deposit Expansion Multiplier formula? (or Money Multiplier).

    1/reserve requirement.

    3. How is money created? Destroyed?

    Money is created when banks make loans.


    Money is destroyed when loans are paid back

    4. Suppose Abe’s Bank has excess reserves of $10,000 and outstanding checkable
    deposits of $200,000. If the reserve requirement is 10%, what is the size of the
    bank’s actual reserves.

    Required Reserves = .10 x $200,000 = $20,000


    Actual Reserves = RR + ER = $20,000 + 10,000 = $30,000

    5. A reserve requirement of 25% means a bank must have $10,000 of reserves if its
    checkable deposits are:
    Reserve Requirement = Required Reserves/Checkable Deposits
    25% = $10,000/CD = $40,000
    6. Suppose the reserve requirement is 25%. If a bank has checkable deposits of $5
    million and actual reserves of $2 million, it can safely lend out:
    Required Reserves = .25 x $5 Million = $1.25 Million
    Excess Reserves = Actual Reserves – Required Reserves = $2 Million - $1.25
    Million = $.75 Million or $750,000.
    7. Assume Bubba Gump Shrimp Company deposits $1,000 in cash in commercial
    Bank Double Zero. If no excess reserves exist at the time this deposit is made and
    the reserve ratio is 20%, Bank Double Zero can increase the money supply by a
    maximum of:
    Required Reserves = .20 x $1,000 = $200
    Excess Reserves = Actual Reserves – Required Reserves
    = $1,000 - $200 = $800
    Use the following to answer questions 8 through 10. Answer the following questions on
    the basis of the consolidated balance sheet for the commercial banking system. Assume
    the reserve requirement is 20%. All figures are in billions.

    Assets Liabilities & Net Worth

    Reserves $ 190 Checkable Deposits $ 820


    Securities 240 Capital Stock 666
    Loans 450
    Property 606 _____
    Total: $1,486 Total: $1,486

    8. The commercial banking system has excess reserves of:

    Required Reserves = .20 x $820 = $164


    Actual Reserves – Excess Reserves = $190 - $164 = $26 Billion

    9. After a deposit of $10 billion of new currency into a checking account in the
    banking system, excess reserves will increase by:

    Required Reserves = .20 x $10 Billion = $2 Billion


    Excess Reserves = AR – RR = $10 Billion - $2 Billion = $8 Billion

    10. After the deposit, the maximum amount by which this commercial banking
    system can expand the money supply by lending is:

    1/.20 = 5; 5 x $34 ($26B + $8B) Billion = $170 Billion

    11. A bank has no excess reserves. If it receives $10,000 in cash from a depositor and
    the bank finds it can safely lend out $5,000, the reserve requirement must be
    _________.

    Required Reserves = AR – ER = $10,000 - $5,000 = $5,000


    Reserve Requirement = Required Reserves/Checkable Deposits
    Reserve Requirement = $5,000/$10,000 = 50%

    12. Suppose the reserve requirement is 10%. If a bank has checkable deposits of
    $5 million and actual reserves of $1 million, it can safely lend out _________.

    Required Reserves = .10 x $5 Million = $.5Million or $500,000


    Excess Reserves = AR – RR = $1 Million - .5Million = $ .5 Million

    13. If Ellie Mae finds $500 under her mattress and deposits the money in her
    checking account at Jed’s bank in Hollywood, what would be the maximum
    expansion of the money supply with a reserve requirement of 25%?
    Required Reserves = .25 x $500 = $125
    Excess Reserves = AR – RR = $500 - $125 = $375
    Max. Expansion = 1/.25 = 4; 4 x $375 = $1,500

    14. Suppose the Fed buys $300 Billion in government securities from the public.
    With a reserve ratio of 20%, what would be the maximum increase in the money
    supply?

    Short-Cut Method:

    1/.20 = 5; 5 x $300 Billion = $1,500 Billion

    Long Method (technically this is how it is done):

    Required Reserves = .20 x $300 Billion = $60 Billion


    Excess Reserves = $300 Billion - $60 Billion = $240 Billion
    Multiplier = 5; Expansion via loans = 5 x $240 Billion = $1,200 Billion
    Then: Add back the original deposit because it is all “new” money
    From the Fed purchase that counts in money creation

    $300 + $1,200 = $1,500 Billion

    ANSWER THE QUESTIONS USING THE BANK BALANCE


    SHEET PROVIDED:

    Davidson’s Bank

    Assets Liabilities

    Required Reserves $200 Demand Deposits $ 2,000


    Excess Reserves 250 Total $ 2,000
    Loans 1,450
    Bonds 100
    Total $2,000

    a) What is the reserve requirement ratio?

    Required Reserves/Demand Deposits = 200/2000 = 10%

    b) How much can this bank loan out?


    $250 in Excess Reserves. One bank can only lend out its excess reserves.

    c) How much can the entire banking system expand the money supply by making loans?

    You must use the Deposit Expansion or Money Multiplier here.

    1/Required Reserves = 1/.10 = 10; 10 x $250 = $2,500

    d. If the Fed bought the $100 in bonds from Davidson’s Bank, what would be the
    immediate effect on the money supply? How much of this purchase could Davidson’s
    bank loan out?

    - Increases by $100
    - All $100. Because it is the bank’s money and not in a demand deposit, it
    is not subject to the reserve requirement. No money has to be set aside as
    a required reserve.

    e. How much could the money supply ultimately increase through the entire banking
    system from this $100 bond purchase?

    - Again, we used the multiplier. It is 10; 10 x $100 = $1,000

    f. Suppose that Tom Herman, one of Davidson’s customers, withdraws $50 from his
    checking account. What effect would this withdrawal have on the following:

    1) The money supply:

    No change. It is already counted in the Money Supply. The composition


    of M, however, changes from demand deposit to cash.

    Davidson’s Bank

    Assets Liabilities

    Required Reserves $200 $195 Demand Deposits $ 2,000 = $1,950


    Excess Reserves 250 205 Total $ 2,000 = $1,950
    Loans 1,450
    Bonds 100
    Total $2,000
    $1,950

    2) Required Reserves:

    a) Recalculate total demand deposits = $2,000 – 50 = $1,950

    b) Multiply $1,950 x .10 (reserve requirement) = $195

    3) Excess Reserves:

    a) Recalculate Actual or Total Reserves:

    $450 (200 RR + 250ER) - $50 withdrawal = $400

    b) Calculate ER = Actual Reserves minus Required Reserves.


    = $400 - $195 = $205

    g. Assume the Fed buys $100 in bonds from the public and the money is redeposited
    into the banking system:

    1. How much of the $100 purchase are required reserves?

    .10 x $100 = $10

    2. How much are excess reserves?

    Excess Reserves = Actual Reserves minus Required Reserves


    . = $100 minus $10 = $90

    3. What is the maximum expansion of the money supply from this $100 bond
    purchase? (assumes the entire banking system is involved)

    a) Use the multiplier times excess reserves.


    10 x $90 = $900

    b) Add back the $100 bond purchase because it is all“new” money


    and counts in money creation since it came from The Fed.

    $900 + 100 = $1,000 (same final answer as question e above, except the
    process is different because the money went into demand deposits. As
    such, money had to be reserved.

    g) If a bank finds that it does not have enough required reserves to meet Fed requirements,
    what can it do to acquire the necessary cash reserves?

    a) It may borrow money from the Fed via the Discount Rate.
    b) It may borrow money from other banks via the Federal Funds Rate.
    c) It may sell government securities.

    i. Assume that Charlie Strong pays back $100 of his loan to Davidson’s Bank. He pays with
    a check from his demand deposit at the bank: (start again with the balance sheet as it
    originally appeared, not with the changes made by the Tom Herman transaction)

    1. What changes occur to the bank’s balance sheet?

    Davidson’s Bank

    Assets Liabilities

    Required Reserves $200 $195 Demand Deposits $ 2,000 = $1,900


    Excess Reserves 250 205 Total $ 2,000 = $1,900
    Loans 1,450 $1,350
    Bonds 100
    Total $2,000 $1,900

    Liability Side: Demand Deposits will drop by $100. Total Liabilities, therefore,
    will drop by $100 to $1,900.
    Asset Side: Required Reserves will change because of the deposit as shown below:

    Assets and Liabilities both drop from $2,000 to $1,900 from the loan repayment.
    Required Reserves = .10 x $1,900 = $190 ($10 drop from $200)
    Loans: Decrease from $1,450 to $1,350
    Excess Reserves increase from $250 to $260

    2. What happens to the money supply due to this $100 loan


    repayment?

    The money supply decreases by $100. When loans are repaid, the money
    supply decreases.

    3. How much of this $100 loan repayment may Davidson’s Bank lend out?

    All of it. It is all the bank’s money and not a demand deposit which
    would be subject to the reserve requirement.

    4. How much is the maximum possible expansion of the money supply


    from this $100 loan repayment? (this implies the entire banking system)

    Take the multiplier x all $100 = 1/.10 = 10; 10 x $100 = $1,000.

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