2. What are the principal sources from which liquidity comes? 3. Describe the purpose and operations of the reserve requirement? Why
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Liquidity refers to the ease with which an asset can be converted into cash without significant loss of value. Several sources contribute to a financial institution's liquidity. Show more…
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(12 points) Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio of 10 percent. a. Show a T-account for BSB. b. Now suppose that BSB's largest depositor withdraws $10 million in cash from her account. If BSB decides to restore its reserve ratio by reducing the amount of loans outstanding, show its new T-account. c. Explain what effect BSB's action will have on other banks. d. Why might it be difficult for BSB to take the action described in part (b)? Discuss another way for BSB to return to its original reserve ratio. 4. (10 points) Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply $40 million. a. If the Fed is using open-market operations, will it buy or sell bonds? b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain your reasoning.
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Suppose that Big Bucks Bank has the simplified balance sheet shown below and that the reserve ratio is 10 percent: Assets Liabilities and net worth (1) Reserves: $27,000 (2) Checkable deposits: $100,000 (1') Securities: $38,000 (2') Loans: $35,000 a. What is the maximum amount of new loans that Big Bucks Bank can make? $ Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount. b. By how much has the supply of money changed? $ c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against this bank? Show this new balance sheet in column 2 and 2'. d. Answer questions a, b, and c on the assumption that the reserve ratio is 5 percent. What is the maximum amount of new loans that this bank can make? $ Show in column 3 and 3' (below) how the bank's balance sheet will appear after the bank has lent this additional amount.
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Macro Topic 4.4 Banking and the Money Supply Part 3 - More Practice - Below is the balance sheet for Bank of 'Merica. Identify the following immediately after Lindsey withdraws $1,000 of cash from the bank. Assets: Required reserves $1,000 Excess reserves $2,000 Customer loans $5,000 Government securities (bonds) - Liabilities: Demand deposits $10,000 Owner's equity $0 11. The Reserve Ratio 12. Government securities 13. Demand deposits 14. Required reserves 15. Excess reserves Part 4 - Even More Practice - Below is the balance sheet for D&J Bank. Identify the change in the following immediately after Jessie deposits $1,000 of cash into the bank. Assets: Required reserves $1,000 Excess reserves $0 Customer loans $19,000 Liabilities: Demand deposits $20,000 Owner's equity $0 16. The Reserve Ratio 17. Demand deposits 18. Customer loans 19. Required reserves 20. Excess reserves Part 5 - Stretch Your Thinking - Answer the following questions. 21. Explain how fractional reserve banking inherently involves the risk of bank runs.
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