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(Credit Creation) Understanding bank balance sheet is useful since it also help our understanding of the process called "credit creation." This process show that the Fed (central bank)'s policy of increasing the money supply is enhance by banks' operations. Suppose an occurrence of the Fed's open market purchas proceed as follows: 1. The Fed decided to purchase $100 millions of securities from Bank A. 2. Bank A holds 10% of its increase in liquidity as required reserves, 40% a

(Credit Creation) Understanding bank balance sheet is useful since it also help our understanding of the process called "credit creation." This process show that the Fed (central bank)'s policy of increasing the money supply is enhance by banks' operations. Suppose an occurrence of the Fed's open market purchas proceed as follows: 1. The Fed decided to purchase $100 millions of securities from Bank A. 2. Bank A holds 10% of its increase in liquidity as required reserves, 40% a

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 23QTD
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1. (Credit Creation) Understanding bank balance sheet is useful since it also helps our understanding of the process called "credit creation." This process shows that the Fed (central bank)'s policy of increasing the money supply is enhanced by banks' operations. Suppose an occurrence of the Fed's open market purchase proceed as follows: 1. The Fed decided to purchase $100 millions of securities from Bank A. 2. Bank A holds 10% of its increase in liquidity as required reserves, 40% as excess reserves, and use 50% as loans to Borrower A. 3. Borrower A holds 50% of her liquidity as currency and 50% as deposits in Bank B. 4. Bank B holds 10% of its increase in liquidity as required reserves, 40% as excess reserves, and use 50% as loans to Borrower B. 5. Borrower B holds 50% of her liquidity as currency and 50% as deposits in Bank C. 4. Finally, Bank C holds all of its increase in liquidity as reserves (required re- serves plus excess reserves). Hence the deposit creation process stops here. The following balance sheet records the changes in compositions of assets and liabilities for each market participants. Fill the numbers in a-i. 1
Transcribed Image Text:1. (Credit Creation) Understanding bank balance sheet is useful since it also helps our understanding of the process called "credit creation." This process shows that the Fed (central bank)'s policy of increasing the money supply is enhanced by banks' operations. Suppose an occurrence of the Fed's open market purchase proceed as follows: 1. The Fed decided to purchase $100 millions of securities from Bank A. 2. Bank A holds 10% of its increase in liquidity as required reserves, 40% as excess reserves, and use 50% as loans to Borrower A. 3. Borrower A holds 50% of her liquidity as currency and 50% as deposits in Bank B. 4. Bank B holds 10% of its increase in liquidity as required reserves, 40% as excess reserves, and use 50% as loans to Borrower B. 5. Borrower B holds 50% of her liquidity as currency and 50% as deposits in Bank C. 4. Finally, Bank C holds all of its increase in liquidity as reserves (required re- serves plus excess reserves). Hence the deposit creation process stops here. The following balance sheet records the changes in compositions of assets and liabilities for each market participants. Fill the numbers in a-i. 1
Fed Assets Securities +$100 million Currency+Reserves +$.__ million Bank A Assets Securities Required reserves Excess reserves Loans Borrower A Assets Currency Deposits -$100 million +$ a million +$b million + $50 million +$c million +$d million Liabilities Borrower B Assets Currency +$h million Deposit +$i million Bank B Assets Required reserves +$e million Excess reserves +$f million Loans +$ g million Liabilities Liabilities Borrowing +$50 million Liabilities Deposits +$ d million Liabilities Borrowing +$g million Bank C Assets Liabilities Reserves +$i million Deposits +$i million
Transcribed Image Text:Fed Assets Securities +$100 million Currency+Reserves +$.__ million Bank A Assets Securities Required reserves Excess reserves Loans Borrower A Assets Currency Deposits -$100 million +$ a million +$b million + $50 million +$c million +$d million Liabilities Borrower B Assets Currency +$h million Deposit +$i million Bank B Assets Required reserves +$e million Excess reserves +$f million Loans +$ g million Liabilities Liabilities Borrowing +$50 million Liabilities Deposits +$ d million Liabilities Borrowing +$g million Bank C Assets Liabilities Reserves +$i million Deposits +$i million
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