--%>
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 : What are Feeder Funds Feeder Funds :

    Feeder Funds: For lawful basis accounting purposes, funds into which some taxes or fees are deposited on collection. In some situations administrative costs, collection expenses, and refunds are paid. The balance of such funds is transferable at any t

    		•
  • Q : What is Administration Administration :

    Administration: It refers to the Governor's Office and those individuals, subdivisions, and offices reporting to it (example, the Department of Finance).

    		•
  • Q : Have mergers influenced competition

    Have mergers influenced competition?Federal Reserve data illustrates that measured on the local level, where competition takes place; markets have in fact experienced more banking competition, not less, in the past decade.

    		•
  • Q : Demand for small automobiles Normal 0

    Normal 0 false false

  • Q : Describe accumulated depreciation

    Describe accumulated depreciation?Depreciation is the allocation of an asset's primary cost over time. Accumulated depreciation is the sum of all the depreciation cost that has been identified to date.

    		•
  • Q : Reducing payroll costs It is likely

    It is likely that in the next few years, employers will face incresing pressures to reduce their payroll costs. critically evaluate the range of ways by which payroll costs can be reduced whilst taking into account the need to maintain a focus on the

    		•
  • Q : Mergers encourage the formation of new

    Do mergers encourage the formation of new banks? Yes. The increase in the number of new banks in the second half of the 1990s coincides with a surge in merger activity in the similar period. A study conducted through the Federal Reserve Bank of

    		•
  • Q : Question related to MPC Normal 0 false

    Normal 0 false false

  • Q : Factors affecting option of maximum

    Describe the factors affecting the alternative of a maximum cash balance amount. The maximum cash balance amount is finding out by obtainable investment opportunities, the expected return on investments, and the transaction cost of making invest

    		•
  • Q : Define the term Judgments Judgments :

    Judgments: It is generally refers to decisions made by courts against the state. The payment of judgments is subject to a range of controls and procedures.

    		•