The Bank A you own has the following balance sheet:
Reserve $120 m Deposits $1000m
Loans $1080 m Bank Capital $200 m
A; If the bank suffers a deposit outflow of $100 million with a required reserve ratio on deposit of 10%, what actions should you take?
Reserve $200m Deposits $1000m
Loans $1000 m Bank Capital $200 m
Also, Bank B you own has the following balance sheet. If the bank suffers the same deposit outflow with a required reserve ratio on deposit of 10%, what actions should you take?
Which balance sheet would you prefer? And why?
Suppose that currency in circulation is $400 billion, the amount of checkable deposits is $800 billion, and excess reserves are $40 billion, assuming 10% of required reserve ratio.
(3 pts) Calculate the money supply.
(3 pts) Calculate the currency-deposit ratio.
(3 pts) Calculate the excess reserve ratio.
(3 pts) Calculate the money multiplier.
(3 pts) Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $760 billion due to a sharp contraction in the economy. Assuming the ratios you calculated above remain the same, predict the effect on the money supply.
(6 pts) Suppose that the central bank conducts the same open market purchases as in question 3, except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, calculate new excess reserves, excess reserve ratio, and the money multiplier.