Suppose we have an economy with the amounts
Monetary Base : $500
Cash : $200
Required Reserve Ratios : 20%
(Part A) Assume that new loans are 100% deposited back to the Checking Deposits Account. Calculate the total amount in Checking Deposits, Reserves, Loans and the Money Supply (Ms) in the economy. (Show all your calculations. Follow the balance sheet methodology provided in the lectures and illustrate at least 3 steps showing the balance sheets of banks).
(Part B) - This part follows Part A - Now assume that households want to deposit an extra $100 to their Checking Deposit Account. Calculate the total amount in Checking Deposits, Reserves, Loans and the Money Supply (Ms) in the economy. (Show all your calculations. Follow the balance sheet methodology provided in the lectures and illustrate at least 3 steps showing the balance sheets of banks).
(Part C) - This part follows Part A (so ignore the scenario in part B) - Now assume that the households decided to deposit only 40% of the new loans back to the Checking Deposits Account. Calculate the total amount in Checking Deposits, Reserves, Loans and the Money Supply (Ms) in the economy. (Show all your calculations. Follow the balance sheet methodology provided in the lectures and illustrate at least 3 steps showing the balance sheets of banks).
Suppose we have an economy with the amounts "money in circulation = $10000"
"money in checkable deposits = $5000"
Let's assume the balance Sheet of "Bank of A" is as follows:
|
|
BANK of A
|
|
|
|
BALANCE SHEET
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Property
|
$2000
|
|
Capital Stock
|
$2000
|
|
Reserve
|
$1000
|
|
Checkable Deposit
|
$5000
|
|
Loans
|
$5000
|
|
Sub Total
|
$7000
|
|
Total
|
$8000
|
|
|
|
|
|
|
|
Net Worth
|
$1000
|
|
|
|
|
Total
|
$8000
|
The required reserve ratio is %20 percent.
Let's assume that Consumers wanted to withdraw $500 dollars from their Checkable Deposits So they want to keep this money in forms of cash in circulation.
What is M1 (money supply) when we look at the effect of this action (considering multiplier effect)? What is the amount of cash in circulation and the amount of checkable deposits? What are the changes in these when you compare them with the initial values?
P.S. First of all solve with multiplier method. Then verify your answer by showing the changes in Balance Sheet of the Bank (you can just show 3 steps since it is not possible to show infinite number of steps. But do not forget to use at the end "the infinite geometric progression formula". You can find an explanation on Pg 216 of your book )