--%>

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 is an Initiative Initiative : The

    Initiative: The power of electors to propose statutes or Constitutional amendments and to accept or reject them. An initiative should be limited to a single subject and be filed with the Secretary of State with the suitable number of voter signatures

  • Q : Describe trustworthy collateral from

    Describe trustworthy collateral from the lenders' perspective? Describe whether accounts receivable and inventory are trustworthy collateral. Assets which are readily marketable, of stable value, and not likely to "disappear" make for trustwort

  • Q : Define Financial Planning Financial

    Financial Planning: It is a comprehensive assessment of an investor's present and future financial state by employing presently known variables to forecast future cash flows, asset values and the withdrawal plans.

  • Q : Finance powerpoint Hi, I am a

    Hi, I am a management student studying in a business school. I have given a case study (attached below in PDF) as evaluation. I was able to get an English version but since i am not familiar with the subject i don't know how to solve this. I would like to know if you can provide any solution f

  • Q : Explain computing of payback period How

    How do we compute the payback period for proposed capital budgeting project? What are the basic criticisms of the payback method? We compute the payback period for proposed project through adding a project's positive cash flows, one period at t

  • Q : Conditions in which warrants value high

    Under what conditions is a warrant's value high? Describe. A warrant's value would be great when the stock price, time to expiration, and/or expected stock price volatility is great.

  • Q : Explain Fiscal Committees Fiscal

    Fiscal Committees: The committees of members in every house of the Legislature which review the fiscal impact of proposed legislation, comprising the Budget Bill. Presently, the fiscal committees comprise the Senate Budget and Fiscal

  • Q : What is Enrolled Bill Report Enrolled

    Enrolled Bill Report (EBR): The analysis prepared on Legislative measures passed by both houses and passed on to the Governor, to give the Governor’s Office with information relating to the measure with a recommendation for action by the Governo

  • Q : Question on budget line On a Lotto

    On a Lotto Canada ticket A person won $15 at the local 7-Eleven & decided to spend all the winnings money on bags of peanuts and candy bars. The cost of candy bars= $.75 and the cost of peanuts = $1.50. a. In general, how woul

  • Q : What is Appropriation Schedule

    Appropriation Schedule: The detail of an appropriation (example, in the Budget Act), exhibiting the distribution of the appropriation to each of the class, programs, or projects thereof.