1. The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent. Draw up a table to show the amount of new deposits in each new bank (show the amounts in the first five of them), the additional reserves held by that bank, and the loans made by that bank, as each successive bank lends out its excess reserves. Finally, calculate the total amount of new deposits, of additional reserves, and of loans made in the economy.
2. A bank has reserves of $34.3 million, securities of $65.2 million, and loans of $287.5 million. It has transaction accounts totaling $357.7 million and capital of $29.3 million. The reserve requirement is 0 percent on the first $7 million of transaction accounts, 3 percent on transaction accounts from $7 million to $47 million, and 10 percent on transaction accounts above $47 million.
a. Draw up the bank's balance sheet and calculate the bank's excess reserves.
b. Suppose the bank makes a loan equal to the amount of its excess reserves that you calculated in part a. Draw up the bank's balance sheet before the customer spends the proceeds of the loan. What are the bank's excess reserves?
c. Now suppose the customer spends the proceeds of the loan. Draw up the bank's balance sheet and calculate its excess reserves.