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Assume a required reserve ratio of 0
Assume a required reserve ratio of 0.20 to complete the following in order: Assets Liabilities and Net Worth Cash $2,000 million $ 800 million Deposits $ 900 million Capital Loans $300 million Bonds $ 600 million Total $ 2,300,000,000 Total $ 2,300,000,000 a. Calculate the initial required reserves for this bank. b. Calculate the initial excess reserves for this bank. C. The FOMC conducts expansionary Open Market Operations and this bank participates completely. Construct a new balance sheet. d. Calculate the money multiplier. e. Calculate the potential deposit creation based on the new balance sheet.
Expert Solution
Solution:-
Given that
A]
Required reserve = Deposits × required reserve ratio
= $2,000 million × 0.20
= $400 million
B]
Initial excess reserve = Cash – Required reserve
= $800 million - $400 million
= $400 million
C]
Worth 100million out of which 10 million new cash reach this bank through its depositors
Cash would be only the required reserve amount.
New balance sheet
D]
Money Multiplier = 1/r = 1/0.2 = 5
Money multiplier = 5
E]
Potential Deposit creation = 10 * 1/0.20 = 50 million
Potential Deposit creation = 50 million
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