1. Below is the balance sheet of a bank. The reserve requirement is 3 percent on the first $30 million of transactions deposits and 10 percent on transactions deposits in excess of $30 million. The bank holds no required clearing balances.
(Amounts on the balance sheet are in millions of dollars.)
Assets Liabilities + Capital
Reserves $15.9 Transactions deposits $180.0
Loans $150.0 Equity capital $ 20.0
Securities $34.1
Total $200.0 Total $200.0
a Calculate the bank's excess reserves.
b Suppose that the bank sells $5 million in securities to get new cash. Draw up the bank's balance sheet after this transaction. What are the bank's excess reserves?
c Suppose that the bank makes a loan to a customer equal to the amount of its excess reserves from part b. Draw up the bank's balance sheet before the customer spends the proceeds of the loan. What are the bank's excess reserves?
d Now suppose that the customer spends the proceeds of the loan. Draw up the bank's balance sheet, and calculate its excess reserves.
2. Consider the following balance sheet of Princeton Bank:
Balance Sheet for Princeton Bank
(Amounts on the balance sheet are in millions of dollars.)
Assets Liabilities + Capital
Reserves $30 Transactions deposits $300.0
Securities $140 Nontransactions deposits $140.
Loans $280 Capital $ 10.0
Total Assets $450 Total $450.0
Of Princeton Bank's reserves, $6 million are required clearing balances held at the Federal Reserve Bank of Philadelphia. Statistics for the economy as a whole are
D=$2,000 billion
R=$200 billion
C/D= 0.2=ratio of currency to transactions deposits,
N/D= 2.0= ratio of nontransactions deposits to transactions deposits,
MMF/D = 1.6 = ratio of retail money-market mutual funds to transactions deposits,
q = 0.08 = 8% = required reserve ratio on transactions deposits = RR/D = ratio of required reserves to transactions deposits
RCB/D = 0.02 = 2%= ratio of required clearing balances to transactions deposits.
A - Calculate the monetary base MB, M1, and M2. Are there any excess reserves in Princeton Bank? Are there any excess reserves in the economy as a whole?
B- Calculate the multipilers for M1 and M2.
C- Calculate the values of N, D, C, R, MMF, and RCB using the fact that C/D = 0.2 and C + D = M1.
D- Suppose that the Fed raises the reserve requirement on transactions deposits to 0.18 = 18%. What happens to Princeton Bank's balance sheet? Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R ?
E- Suppose that instead of raising the reserve requirement as in part c, the Fed sells $150 billion of securities in the open market, including $30 million to a customer of Princerton Bank. What happens to Princeton Bank's balance sheet? Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R?