HW Monetary System Assignment - The money creation process 1
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4/14/24, 2:29 PM MindTap - Cengage Learning Attempts | 1.1 | | | Keepthe Highest 1.1/ 4 7. The money creation process Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 20%. Alex, a Southeast Mutual Bank customer, deposits $750,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Liabilities Reserves v $750,000 V' Deposits v $750,000 V¥ Points: s 1/ 1 Explanation: Close Explanation When Alex deposits the $750,000 into Southeast Mutual Bank, it creates both an asset and a liability for the bank. On the asset side of the T-account, the $750,000 increases the bank's reserves. The bank can use some of these additional reserves to make loans to other people. On the liability side of the T-account, the $750,000 is recorded as a demand deposit, because Alex could demand his deposit back at any time by coming into the bank and asking for it, by writing a check, or by using a debit card. Assets Liabilities Reserves $750,000 Deposits $750,000 Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 750,000 o0 |x |0 x Points: 0/1 Explanation: Close Explanation Because the required reserve ratio is 20%, Southeast Mutual Bank is required to hold 20% of its fresh reserves (that is, the initial deposit). Since 20% of $750,000 is $150,000, this means that Southeast Mutual Bank's required reserve has increased by $150,000. The remaining 80% of the fresh reserves, or $600,000, is excess reserves and can be used to make loans. Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Susan, who immediately uses the funds to write a check to Raphael. Raphael deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentld=6099182456087469109046107188&elSBN=9780357723005&id=2058047988&sna... 1/3
4/14/24, 2:29 PM MindTap - Cengage Learning to Clancy, who writes a check to Becky, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Eileen in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) Southeast Mutual Bank | X | 150,000 |V | 750,000 |X Walls Fergo | 750,000 |X | [x [ 750,000 |x Bank PIMorton Bank | X | [x [ 750,000 |x - Points: 8 0.11/1 Explanation: Close Explanation You already found that of the $750,000 initial deposit, 20% (or $150,000) had to be held as required reserves and the remaining 80% (or $600,000) could be loaned out. If you follow that $600,000 loan, you can see that when it is deposited into Walls Fergo Bank, 20% of that $600,000 must be held as required reserves by Walls Fergo Bank and the remaining 80% can be loaned out: Increase in Walls Fergo Bank's Required Reserves Increase in Walls Fergo Bank's Required Resetves = 0.20 % $600,000 0.20 x $600,000 = = $120,000$120,000 Increase in Walls Fergo Bank's Excess Reserves Increase in Walls Fergo Bank's Excess Reserves = = (.80 % $600,000 0.80 x $600,000 = = $480,000$480,000 Now, those $480,000 of excess reserves can be loaned out. When they are loaned and then deposited into PJMorton Bank, PJMorton Bank's required and excess reserves increase in the same way: Increase in PJMorton Bank's Required Reserves Increase in PJMorton Bank's Required Reserves= = (.20 x $480,000 0.20 x $480,000 = = $96,000$96,000 Increase in PJMorton Bank's Excess Reserves Increase in PJMorton Bank's Excess Reserves = = 0.80 x $480,000 0.80 x $480,000 = $384,000$384,000 Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of $3,000,000 X in demand deposits. Points: 0/1 Explanation: Close Explanation https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentld=6099182456087469109046107188&elSBN=9780357723005&id=2058047988&sna... 2/3
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Related Questions
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at
25%. Paolo, a Southeast Mutual Bank customer, deposits $1,800,000 into his checking account at the local branch.
Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
Deposits
Assets
(Dollars)
1,800,000
$1,800,000 ▼
Reserves
Liabilities
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 25%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited Change in Excess Reserves
Change in Required Reserves
(Dollars)
(Dollars)
Southeast Mutual Bank
Walls Fergo Bank
PJMorton Bank
$450,000
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Lucia, who immediately uses the funds to write a check to Kenji. Kenji
deposits the funds…
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assume the required Reserve ratio is 12 for scientific Commercial Bank has actual reserves of 15,000 loans of 85,000 and checkable deposits of 80,000 what is required reserves
a 5,400
B 9600
C 15,000
D 80,000
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John deposits $1,800 into his checking account. If the reserve ratio is 10%, what are the required and excess reserves?
Required reserves: $[
Excess reserve
erves: $
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7. The money creation process
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at
20%. Darnell, a Southeast Mutual Bank customer, deposits $1,500,000 into his checking account at the local branch.
Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
Assets
Liabilities
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited Change in Excess Reserves
(Dollars)
(Dollars)
1,500,000
Change in Required Reserves
(Dollar)
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Beth, who immediately uses the funds to write a check to Andrew.
Andrew deposits the funds immediately into his checking account at Walls Fergo Bank. Then…
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Research and identify two cryptocurrencies, how they have evolved in recent years and howmight you expect them to evolve further in the future. Discuss whether these means of“payment” fully fulfil all three functions of “money.”
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4) Smart Financial starts its first day of operations with $15 million in capital. A total of
$130 million in checkable deposits is received. The bank makes a $25 million
commercial loan and another $50 illion in mortgages with the following terms: 200
Page 1 of 2
standar 30-year, fixed rate mortgages with a nominal annual rate of 5.25%, each for
$250,000.
Assume that required reserves are 11%.
a. What does the bank balance sheet look like?
b.
How well capitalized is the bank? Show the calculation.
c.
Calculate the risk-weighted assets and risk-weighted capital ratio after Smart
Financial's first day.
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Consider the following balance sheet of Berjaya Bank. The required reserve ratio on demand
deposits is 8%.
Berjaya Bank
Aset / Assets (million $)
Rizab / Reserves
Pinjaman / Loans
Sekuriti / Securities
Liabiliti / Liabilities (million $)
Deposit semasa
Demand deposits
Modal bank / Net Worth
30
290
150
140
30
1. Calculate the bank's excess reserves
2. Suppose Berjaya Bank sells $40 million of its securities to the central bank. Show the
balance sheet of Berjaya Bank after this transaction
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True or False:
1. The main reason people demand and hold money instead of ex bonds, is that it earns interest payment.
Type out the correct answer and give proper explanation of why true n why false . Answer within 40 min.thank you
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Below is the balance sheet for a bank. Under "Other" it has listed "$X" just think of this as the dollar amount needed to make the balance sheet balance. It is not important what that value is for this question.
AssetsLiabilitiesReserves 42Deposits 245Loans 160
Securities 48Other $X
Using the balance sheet above, find the level of required reserves for this bank if the required reserve ratio = 8%(Give answers to 2 decimal places as needed)
arrow_forward
5. The money creation process
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at
5%. Musashi, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch.
Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
Assets
Liabilities
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited Change in Excess Reserves
(Dollars)
(Dollars)
200,000
Change in Required Reserves
(Dollars)
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Kyoko, who immediately uses the funds to write a check to Jacques.
Jacques deposits the funds immediately into his checking account at Walls Fergo Bank. Then…
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1.Name a reason why retail Money Market Mutual Funds are not included in M1 but demand deposits and other checkable deposits are. What specific role of money does this analysis (e.g. medium of exchange, standard of value, standard of deferred payments, store of value) pertain to?
2.Passbook savings accounts and NOW accounts (part of checkable deposits) are both interest bearing bank deposits, but NOW accounts have checkable privileges and passbook savings accounts have no checkable privileges. Then why would anyone have a passbook savings deposit? Provide the economic concept behind this argument
3.Choose an interest rate other than the 3 month Treasury Bill rate or the Federal Funds rate. Provide a definition for this interest rate. Now consider the website of the Federal Reserve Economic Database (FRED), given by http://research.stlouisfred.org/fred2/. Using this database, look up the series for monthly observations for this interest rate, and provide a graph of this…
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Table 2
First National Bank
Assets
Liabilities and Owners' Equity
Reserves
$1,200
Deposits
$9,000
Loans
$8,000
Debt
$800
Short-term securities $800
Capital (owners' equity) $200
Refer to Table 2. The required reserve ratio is 6 percent and First National Bank sells $150 of its short-term securi
to the Federal Reserve. This action will
increase First National's reserves by S150. Its excess reserves are $240.
decrease First National's reserves by $150. Its excess reserves are $0.
increase First National's reserves by $150. Its excess reserves increase by $150.
increase First National's reserves by $150. Its total reserves increase by $150.
both c and d above
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4. Working through an open-market operation
Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves.
Assets
(Billions of Dollars)
Total reserves 5 Checkable deposits
25
20
50
Loans
Securities
Total
O
What is the required reserve ratio?
40%
25%
Liabilities and Net Worth
5%
10%
Total
50
50
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Below is the balance sheet for a bank. Under "Other" it has listed "$X" just think of this as the dollar amount needed to make the balance sheet balance. It is not important what that value is for this question.
AssetsLiabilitiesReserves 44Deposits 255Loans 155
Securities 51Other $X
Using the balance sheet above, find the level of excess reserves this bank is holding if the required reserve ratio = 6%(Give answers to 2 decimal places as needed)
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11. Macroland has a very simple banking system, in which there is only one chartered bank (The First Bank).
The government of Macroland imposes a minimum required reserve ratio of 3%. Individuals in Macroland
hold a fixed amount of $1200 in the form cash to facilitate their daily transactions and will deposit any
excess amount of money into their bank accounts. The initial balance sheet of the First Bank is as follows:
Assets
Liabilities & Equity
Reserves
$255
Chequable deposits
$7500
Loans
$7400
Shareholder equity
$155
Note: Unless otherwise stated, the First Bank will hold the excess reserves fixed at the current level as
shown in the initial balance sheet and will lend out any surplus of reserves beyond this.
a. Find the required reserves and the excess reserves held by the First Bank.
b. Suppose there is a change in money demand such that people increase their cash holdings by $45 by
withdrawing cash from their bank accounts. By how much will the money supply change?
c. Return to…
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Initial deposit is $10,000
Required Reserve Ratio is 20%
Calculate:
$ Multiplier
Required Reserves
Excess Reserves
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Explain the FOUR (4) functions of Money.
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-The Golden State Bank has total cash reserves of $110,000, deposits of $200,000, and loans of $90,000. The reserve requirement is 5 percent. This bank can make additional loans up to the amount of:
$10,000
$5,500
$100,000
$190,000
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calculate the value of money multiple if legal reserve ratio is 12.5%
Urgent
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The commercial banking system has excess reserves of $3,000. Then new loans of $40,000 are subsequently made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be ___%
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20.
Bank of New City has $750 million in deposits. The required reserve ratio is 15%.
Bank of New City must keep_______ in reserves.
$150.5 million
$60.5 million
$112.5 million
$160.5 million
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7. The money creation process
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Hubert, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank.
Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).
Assets
Liabilities
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited
Change in Excess Reserves
Change in Required Reserves
(Dollars)
(Dollars)
(Dollars)
500,000
Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the funds to write a check to Clancy. Clancy…
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Table 13.2:
FIRST CHARTER BANK
Assets
Reserves
$700
$200
$900
Liabilities
Deposits
Net Worth
?
?
Loans
?
Total
Total
17. Refer to Table 13.2. The required reserve ratio is 20%. If the First Charter Bank is
Meeting its reserve requirement and has no excess reserves, its reserve equal:
a) $100.
b) $150.
c) $140.
d) $180.
18. Refer to Table 13.2. The required reserve ratio is 20%. If the First Charter Bank is
Meeting its reserve requirement and has no excess reserves, its loans equal:
a) $710
b) $460
c) $550
d) $760
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Round
Deposits
Required Reserves of 20%
Excess Reserves
New Loans
50% of loan proceeds are held as currency in circulation by people
Loan proceeds redeposited
1
$500
$100.00
$400.00
$400.00
$200.00
$200.00
2
$200
$40
$160
$160
$80
$80
3
$80
$16
$64
$64
$32
$32
4
$32
$6.40
$25.60
$25.60
$12.80
$12.80
5
$12.80
$2.56
$10.24
$10.24
$5.12
$5.12
6
$5.12
$1.02
$4.10
$4.10
$2.05
$2.05
7
$2.05
$.41
$1.64
$1.64
$.82
$.82
8
$.82
$.16
$.66
$.66
$.33
$.33
9
$.33
$.07
$.26
$.26
$.13
$.13
10
$.13
$.03
$.10
$.10
$.05
$.05
Totals
$833.25
$166.65
$666.60
$666.60
$333.30
$333.30
Calculate the new money supply.
Calculate the money multiplier.
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Your bank has the following balance sheet:
Assets
Liabilities
Checkable
Reserves $90 million
$380 million
deposits
$130
Securities
million
Loans
$200 million
Bank capital
$40 million
If the required reserve ratio is 20%, what will be the size of this bank (as measured by its total assets
or liabilities) after $20 million deposit outflow if it just meets reserve deficiency by taking out a
discount loan from the Federal Reserve?
$402 million
$400 million.
OOOO
$420 million.
$412 million.
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1 A banking system is described below. All $
millions. All banks keep a reserve ratio of 20%. [25]
Assets Reserves 14.4 Loans 125 Liabilities Demand
Deposits 80 Equity Property 59.4 Assume a new
$8 million deposit is made from outside the
banking system – possibly from another country.
1.1 Calculate the value of excess reserves, if any,
after the new deposit is made. 1.2 Calculate the
value of the money multiplier in this system. 1.3
Calculate the amount of new money the banking
system can generate in new loans.
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Reserves $1,000
Loans 7,000
1) 12.5%
The First Bank of Ohio
O2) 14.3%
Assets
3) 87.5%
Refer to the above T-account, what is the reserve ratio?
Liabilities
4) Cannot determine
Deposits $8,000
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- 7. The money creation process Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 20%. Darnell, a Southeast Mutual Bank customer, deposits $1,500,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves (Dollars) (Dollars) 1,500,000 Change in Required Reserves (Dollar) Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Beth, who immediately uses the funds to write a check to Andrew. Andrew deposits the funds immediately into his checking account at Walls Fergo Bank. Then…arrow_forwardResearch and identify two cryptocurrencies, how they have evolved in recent years and howmight you expect them to evolve further in the future. Discuss whether these means of“payment” fully fulfil all three functions of “money.”arrow_forward4) Smart Financial starts its first day of operations with $15 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 illion in mortgages with the following terms: 200 Page 1 of 2 standar 30-year, fixed rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 11%. a. What does the bank balance sheet look like? b. How well capitalized is the bank? Show the calculation. c. Calculate the risk-weighted assets and risk-weighted capital ratio after Smart Financial's first day.arrow_forward
- Consider the following balance sheet of Berjaya Bank. The required reserve ratio on demand deposits is 8%. Berjaya Bank Aset / Assets (million $) Rizab / Reserves Pinjaman / Loans Sekuriti / Securities Liabiliti / Liabilities (million $) Deposit semasa Demand deposits Modal bank / Net Worth 30 290 150 140 30 1. Calculate the bank's excess reserves 2. Suppose Berjaya Bank sells $40 million of its securities to the central bank. Show the balance sheet of Berjaya Bank after this transactionarrow_forwardTrue or False: 1. The main reason people demand and hold money instead of ex bonds, is that it earns interest payment. Type out the correct answer and give proper explanation of why true n why false . Answer within 40 min.thank youarrow_forwardBelow is the balance sheet for a bank. Under "Other" it has listed "$X" just think of this as the dollar amount needed to make the balance sheet balance. It is not important what that value is for this question. AssetsLiabilitiesReserves 42Deposits 245Loans 160 Securities 48Other $X Using the balance sheet above, find the level of required reserves for this bank if the required reserve ratio = 8%(Give answers to 2 decimal places as needed)arrow_forward
- 5. The money creation process Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 5%. Musashi, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves (Dollars) (Dollars) 200,000 Change in Required Reserves (Dollars) Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Kyoko, who immediately uses the funds to write a check to Jacques. Jacques deposits the funds immediately into his checking account at Walls Fergo Bank. Then…arrow_forward1.Name a reason why retail Money Market Mutual Funds are not included in M1 but demand deposits and other checkable deposits are. What specific role of money does this analysis (e.g. medium of exchange, standard of value, standard of deferred payments, store of value) pertain to? 2.Passbook savings accounts and NOW accounts (part of checkable deposits) are both interest bearing bank deposits, but NOW accounts have checkable privileges and passbook savings accounts have no checkable privileges. Then why would anyone have a passbook savings deposit? Provide the economic concept behind this argument 3.Choose an interest rate other than the 3 month Treasury Bill rate or the Federal Funds rate. Provide a definition for this interest rate. Now consider the website of the Federal Reserve Economic Database (FRED), given by http://research.stlouisfred.org/fred2/. Using this database, look up the series for monthly observations for this interest rate, and provide a graph of this…arrow_forwardTable 2 First National Bank Assets Liabilities and Owners' Equity Reserves $1,200 Deposits $9,000 Loans $8,000 Debt $800 Short-term securities $800 Capital (owners' equity) $200 Refer to Table 2. The required reserve ratio is 6 percent and First National Bank sells $150 of its short-term securi to the Federal Reserve. This action will increase First National's reserves by S150. Its excess reserves are $240. decrease First National's reserves by $150. Its excess reserves are $0. increase First National's reserves by $150. Its excess reserves increase by $150. increase First National's reserves by $150. Its total reserves increase by $150. both c and d abovearrow_forward
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