ECON Problem set3.pdf - YBU Business School ECON 102...

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1 YBU Business School ECON 102 2014/2015 Spring PROBLEM SET # 3 with ANSWERS (Chapter 25) PART A: PROBLEMS 1. Arrange the following items on the proper side of a private bank’s balance sheet: Demand deposits $5,000,000 Saving deposits $1,000,000 Reserve deposits with the Central Bank $1,000,000 Loans to the public $4,000,000 Security holdings $1,500,000 Bank building and fixtures $360,000 Net Worth $860,000 2. Tornado Bank is the only bank in the economy. Suppose that $20000 is deposited in this bank and reserve requirement ratio is 10% Assuming that there is no cash drain in the system and Tornado Bank keeps no excess reserves; a) Fill the final T-account for Tornado Bank Tornado Bank (After $20000 deposit) Assets Liabilities Reserves $ Loans $ Deposits $ b) Now, assuming that $10000 is withdrawn; fill the final T-account for Tornado Bank Tornado Bank (After $10000 withdrawal) Assets Liabilities Reserves $ Loans $ Deposits $ c) Calculate the money multiplier. 3. Suppose that Trust Us Insurance Company buys a US Treasury bill from the Central Bank for $10,000. It pays for the bill by writing a check on its account with bank A. The T-account below shows the initial situation: Bank A (Initial Situation) Assets Liabilities Reserves $100,000 Loans $900,000 Deposits $1,000,000
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2 a) If the reserve requirement ratio is %1 0, what are bank A’s required reserves initially? Does it have excess reserves initially? b) Show the immediate effect of the withdrawal from bank A in the T-account below.
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