--%>
Assignment Help - homework help

Question based on consolidated balance sheet

Assume the simplified consolidated balance sheet illustrated below is for the whole chartered banking system. All of the figures are in billions. Desired reserve ratio =25 %.

1575_simplified consolidated balance sheet.png

a. What amount of excess reserves does the chartered banking system hold? Determine maximum amount the banking system might lend? Illustrate in column 1 how the consolidated balance sheet would appear after this amount has been lent. Determine the monetary multiplier?

b. Answer the questions in part a supposing that the reserve ratio is 20 %. Describe the resulting differentiation in the lending ability of the chartered banking system.

 

 

E

Expert

Verified

(a) Desired reserves is $50 billion (= 25% of $200 billion); thus excess reserves will be $2 billion (= $52 billion - $50 billion).  Maximum amount that banking system can lend is $8 billion (= 1/.25 - $2 billion).  Column (1) of Assets data =$52 billion; $48 billion; $108 billion.  Column (1) of Liabilities data= $208 billion.  Monetary multiplier is 4 (= 1/.25).

(b) Desired reserves = $40 billion (= 20% of $200 billion); thus excess reserves = $12 billion (= $52 billion - $40 billion).  Maximum amount banking system can lend = $60 billion (= 1/.20 - $12 billion).  Column (1) data for assets after loans (top to bottom); $52 billion; $48 billion; $160 billion.  Column (1) data for liabilities after loans:  $260 billion.  Monetary multiplier = 5 (= 1/.20).  The decrease in the reserve ratio increases the banking system’s excess reserves from $2 billion to $12 billion and enhances the size of the monetary multiplier from 4 to 5.  Lending capacity becomes 5 - $12 = $60 billion.

 

   Related Questions in Finance Basics

  • Q : Explain the primary advantage of

    Explain the primary advantage to a corporation of investing some of its funds within working capital? Through investing in working capital a firm gets the liquidity it require helping it to pay its bills. Therefore the risk of the firm is reduce

    		•
  • Q : Determine the new per unit cost of

    Normal 0 false false

  • Q : Describe the risk-return relationship

    Describe the risk-return relationship.The relationship among risk and required rate of return is term as the risk–return relationship.  This is a positive relationship since the more risk assumed, the higher the required rate of retur

    		•
  • Q : Which insurance company takes on the

    Which kind of insurance company usually takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks sheltered against by property and casualty companies are much less predictable than are the risk

    		•
  • Q : What is Reference Code Reference Code :

    Reference Code: A three-digit code recognizing whether the item is from the Budget Act or some other source (example, legislation), and its character (example, state operations). This is the middle segment of the budget item or appropriation number.

    		•
  • Q : Explain Plan of Financial Adjustment

    Plan of Financial Adjustment (PFA): This is the plan proposed by a department, accepted by the Department of Finance, and acknowledged by the State Controller's Office (SCO), to allow the SCO to assign costs paid from one item to one

    		•
  • Q : Explain Statewide Cost Allocation Plan

    Statewide Cost Allocation Plan (SWCAP): It is the amount of state administrative, General Fund costs (example, amounts expended by the central service departments like the State Personnel Board, State Treasurer’s Office, State C

    		•
  • Q : Define Cash Basis of Accounting Cash

    Cash Basis of Accounting: The base of accounting in which expenditures and revenues are recorded whenever cash is received or distributed.

    		•
  • Q : Determine level of productivity in this

    Normal 0 false false

  • Q : Describe matching principle of working

    Describe matching principle of working capital financing? Explain the benefits of following this principle? The matching principle is while short-term financing is utilized for temporary current assets while long-term financing is utilized for

    		•