hw 2-27 - 1 Asset = good liabilities = bad net worth =...

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1. Asset = good liabilities = bad net worth = assets - liabilities A balance sheet is a statement of assets and claims (or liabilities and net worth). It must balance because every asset is claimed by someone, so that assets (the left-hand side) = liabilities + net worth (the right-hand side). The major assets of a bank are: cash (including cash reserves held by the Fed), its property, the loans it has made, and the securities it holds over and above general loans. Its liabilities are the deposits of its customers. The difference between the assets and liabilities is the bank’s net worth, which is shown on the liabilities side, thus ensuring that the balance sheet balances. 2. Reserves provide the Fed a means of controlling the money supply. It is through increasing and decreasing excess reserves that the Fed is able to achieve a money supply of the size it thinks best for the economy. Reserves are assets of commercial banks because these funds are cash belonging to them; they are a claim the commercial banks have against the Federal Reserve Bank. Reserves deposited at the Fed are a liability to the Fed because they are funds it owes; they are claims that commercial banks have against it. Excess reserves are the amount by which actual reserves exceed required reserves: Excess reserves: Excess reserves = actual reserves - required reserves. Commercial banks can safely lend excess reserves, thereby increasing the money supply. 3. Not agree. The M1 money supply consists of currency outside of the banks (cash in the hands of the public) and checking account deposits of the public in the commercial banks. The deposit of currency into a checking account in a bank has changed the form of the money supply but not the amount.
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