Exercise 15 Answers

Exercise 15 Answers - Assets Liabilities Bank Reserves $70...

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ECON 423 Class Exercise 15 1. Comment on the behavior of the reserve ratio in Bank of America’s balance between 2007 and 2010. The reserve ratio increased from approximately 5% to 10%. The quantitative easing by the Fed is likely the main reason for this. 2. What happened to loans made by BOA between 2008 and 2009? There was a decrease in the loans made by BOA during this time. This could have been due to two reasons. Demand for loans might have been low due to the economic slowdown during this period. Also, banks have become cautious about making loans due to the large number of loan defaults during the financial crisis. 3. Consider the following Balance Sheet of a fictitious Bank. Assume that the required reserve ratio is 0.10. Assets Liabilities Bank Reserves $120 million Deposits $1000 million T-securities $200 million Equity $100 million Loans $780 million a. If this Bank faces a withdrawal of $50 million, what will happen to its reserve position? Show the new balance sheet.
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Unformatted text preview: Assets Liabilities Bank Reserves $70 million Deposits $950 million T-securities $200 million Equity $100 million Loans $780 million The bank will have reserve shortage. The bank is now required to hold $95 million and faces a shortage of $25 million. b. List four different ways that the bank can use to replenish its reserves. (i) The bank can sell T-securities (Sale or a Repurchase Agreement) (ii) The bank can use the discount window at the Fed. (iii) The bank can borrow funds from other banks in the federal funds market. (iv) The bank can sell some loans (v) The bank can offer attractive interest rates on CD and improves its reserves. 4. Let us say that the Bank sells just enough T-securities to bring reserves to the legal limits. What will the size of the sale of T-securities? Write the new balance sheet Assets Liabilities Bank Reserves $95 million Deposits $950 million T-securities $175 million Equity $100 million Loans $780 million...
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This note was uploaded on 02/13/2012 for the course ECON 423 taught by Professor Vd during the Spring '08 term at UNC.

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