The amount that the bank should lend, assuming that it holds no excess reserves .

Question

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Answer 1

Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Students have asked these similar questions

Consider a bank that has made a large number of loans at a fixed interest rate of 4% and pays 3% interest to depositors. Assume that interest rates go up. New loans are now being made at 6% throughout the economy and depositors are being paid 5% interest. How does this change affect the bank's financial position? (1oint

6. Answer all of the following: As a first-year student, you need to borrow £40,000 in order to finance your university education. You intend to repay this loan over time after you graduate. Explain why seeking out an individual saver to borrow money from could be problematic. Then identify which service a bank provides to the economy that eliminates this problem. (a) (b) Borrowing from the central bank or other banks is a short-term solution for a bank when it is illiquid. What do you think would be a more long-term solution if a bank is persistently illiquid? (c) Why is the short-term interest rate equal to the base rate?

15. Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount of excess reserves?

Answer 2

Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Answer 3

Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 6

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 7

Chapter 14, Problem 5P

Sub-part

A

To determine

The amount that the bank should lend, assuming that it holds no excess reserves.

Answer 8

Sub-part

A

Expert Solution

Explanation of Solution

a. If Bank A wishes to hold no excess reserves form the deposit of $1,000, then the deposits would go up by $1,000 in liabilities. In the assets, the required reserves increase by $100 (10% required reserve of $1,000) and loans increase by $900 as the bank lends all the remaining reserves holding no excess reserve.

Bank A's balance sheet
Assets		Liabilities
Reserves	$100	Deposits	$1,000
Loans	$900

Answer 9

Sub-part

A

Expert Solution

Answer 10

Sub-part

A

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 13

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 14

Sub-Part

B

To determine

The changes in the balance sheet of bank B, when maximum amount is lent..

Answer 15

Sub-Part

B

Expert Solution

Explanation of Solution

The Bank B receives a deposit of $900 which it plans to lend keeping the required reserve. Thus, it will have similar effects as in part A. Bank B’s deposits increase by $900, and its reserves and loans increase by $90 (10% required reserve of $900) and $810 respectively.

Bank B's balance sheet
Assets		Liabilities
Reserves	$90	Deposits	$900
Loans	$810

Answer 16

Sub-Part

B

Expert Solution

Answer 17

Sub-Part

B

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 20

Sub-Part

C

To determine

The same process for banks C, D and E.

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 21

Sub-Part

C

To determine

The same process for banks C, D and E.

Answer 22

Sub-Part

C

Expert Solution

Explanation of Solution

b. Similar, effects will take place in Banks C, D, and E. Each of their deposit will increase, and, holding 10% of reserves, their loans will increase too.

Bank C's balance sheet
Assets		Liabilities
Reserves	$81	Deposits	$810
Loans	$729

Bank D's balance sheet
Assets		Liabilities
Reserves	$72.90	Deposits	$729.00
Loans	$656.10

Bank E's balance sheet
Assets		Liabilities
Reserves	$65.61	Deposits	$656.10
Loans	$590.49

Answer 23

Sub-Part

C

Expert Solution

Answer 24

Sub-Part

C

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 27

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 28

Sub-Part

D

To determine

The total change in the money supply as a consequence of $1000 initial deposit.

Answer 29

Sub-Part

D

Expert Solution

Explanation of Solution

The change in the money supply takes place when the excess reserves are lent out by the first bank. The formula to calculate the change in money supply is change in fresh reserves times the reciprocal of the reserve ratio. Thus, ΔM=Δfresh reserves×1r=$1,000×10.1=$10,000.

Answer 30

Sub-Part

D

Expert Solution

Answer 31

Sub-Part

D

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 34

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.

Answer 35

Sub-Part

E

To determine

The effect on the total change in the money supply with holding the level of excess reserves.

Answer 36

Sub-Part

E

Expert Solution

Explanation of Solution

If each of the banks plans to hold 5% excess reserves, then the money supply will reduce by 5%. Thus, the reserve ratio increases from 10% to 15%. With this effect, the change in money supply will be as follows:

ΔM=Δfresh reserves×1r=$1,000×10.15=$6,666.67.

Answer 37

Sub-Part

E

Expert Solution

Answer 38

Sub-Part

E

Expert Solution

Answer 39

Expert Solution

Answer 40

Economics Concept Introduction

Introduction:

The Federal Reserve and banking system are responsible for the creation of money in the economy. The first step of this money creation process starts when the Federal Reserve injects money in the economy by buying bonds. This money is stored in a bank. Then, the bank would keep the required reserves with themselves, and lent the remaining excess reserves. These excess reserves will then be stored with some other bank and the other bank would also keep the required reserve and make a loan for the remaining amount. These excess reserves keep flowing in the economy, thus, creating money at every stage. A bank’s balance sheet has the deposit account and capital account on the liabilities side, and cash reserves, required reserves, loans, and securities are on the asset side of the bank’s balance sheet that are affected by the money creation process.