Assignment
Principles of Macroeconomics
1. You are given this balance sheet for a bank.
Assets Liabilities
Reserves $ 100 Deposits $1,000
Loans $ 900
The required reserve ratio is 10%.
a. How much is its excess reserve?
b. Suppose Ms. A deposits $500 to her account at this bank. Show the effect of this transaction on the bank's balance sheet. How much is its excess reserve after the transaction?
c. How much will M1 increase when the money creation process (involving the whole banking sector and the general public) from the loan-making of this bank (using its excess reserve from part (b)) is completed. Assume that there are no leakages of cash holding by the general public and excess reserve holding by banks.
2. What is the fractional reserve system? Why is it prone to bank runs? What are the protection measures offered by the government to prevent bank runs?
3. Suppose Bank A pays back a discount loan of $1 million to the Fed. Show the changes in the balance sheets of both Bank A and the Fed, and calculate the resulting change in M1 according to the simple money multiplier. The required reserve ratio is 20%.