Question
In: Economics
Suppose Leo Messi deposits $3,500 cash in the Humongous National Bank. The required reserve ratio in...
- Suppose Leo Messi deposits $3,500 cash in the Humongous
National Bank. The required reserve ratio in this economy is 12%.
- Fill out the blanks in the Humongous National Bank’s T-account to reflect this transaction. Assume that Humongous National did not have any previous deposits. Show your calculations.
Answer:
Humongous National’s T-account:
| ASSETS | Liabilities |
| TR= | D= |
| RR= | |
| ER= |
- As a result of Leo Messi’s deposit, what is the maximum amount (in $) that Humongous National can loan out?
Answer:
- Now, suppose that Humongous National loans the amount that you found in part b) to Ronaldinho Gaúcho.
Fill out the blanks in the Humongous National Bank’s T-account to reflect this transaction. Show your calculation.
Answer:
Humongous National’s T-account:
| ASSETS | Liabilities |
| TR= | D= |
| RR= | |
| ER= |
- As a result of this transaction, can Humongous National continue loaning out money using Leo Messi’s initial deposit of $3,500?
Answer: (circle the correct answer)
YES NO
- Now, suppose that Ronaldinho Gaúcho deposits a loan from Humongous National Bank in the Financial National Bank. The required reserve ratio in this economy is still 12%. Assume that Financial National did not have any previous deposits.
Fill out the blanks in the Financial National Bank’s T-account to reflect this transaction.
Show your calculation.
Answer:
Financial National's T-account:
| ASSETS | Liabilities |
| TR= | D= |
| RR= | |
| ER= |
Financial National’s T-account:
- As a result of Ronaldinho’s transaction, what is the maximum amount (in $) that Financial National can loan out?
Answer:
- Now, suppose that Financial National loans $1,500 to Gianluigi Buffon.
Fill out the blanks in the Financial National Bank’s T-account to reflect this transaction.
Show your calculation.
Answer:
Financial National’s T-account:
| ASSETS | Liabilities |
| TR= | D= |
| RR= | |
| ER= |
- As a result of this transaction, can Financial National continue loaning out money using Ronaldinho’s initial deposit?
Answer: (circle the correct answer)
YES NO
- Suppose Financial National and Humongous National are the only 2 commercial banks in the economy. The required reserve ratio is 12%.
Calculate by how much money supply in this economy can go up as a result of Leo Messi’s initial deposit of $3,500.
Show ALL STEPS of your calculations and the unit of account.
Answer:
Solutions
Expert Solution
- Suppose Leo Messi deposits $3,500 cash in the Humongous National Bank. The required reserve ratio in this economy is 12%
Answer:
Humongous National’s T-account:
| ASSETS | Liabilities |
| TR=3500 | D=3500 |
| RR=420 | |
| ER=3080 |
- As a result of Leo Messi’s deposit, what is the maximum amount (in $) that Humongous National can loan out?
Answer: Equal to excess reserve=3080
- Now, suppose that Humongous National loans the amount that you found in part b) to Ronaldinho Gaúcho.
Fill out the blanks in the Humongous National Bank’s T-account to reflect this transaction. Show your calculation.
Answer:
Humongous National’s T-account:
| ASSETS | Liabilities |
| TR=420 | D=3500 |
| RR=420 | |
| Loan=3080 |
- As a result of this transaction, can Humongous National continue loaning out money using Leo Messi’s initial deposit of $3,500?
Answer: NO
- Now, suppose that Ronaldinho Gaúcho deposits a loan from Humongous National Bank in the Financial National Bank. The required reserve ratio in this economy is still 12%. Assume that Financial National did not have any previous deposits.
Fill out the blanks in the Financial National Bank’s T-account to reflect this transaction.
Show your calculation.
Financial National's T-account:
| ASSETS | Liabilities |
| TR=3080 | D=3080 |
| RR=369.6 | |
| ER=2710.4 |
Financial National’s T-account:
- As a result of Ronaldinho’s transaction, what is the maximum amount (in $) that Financial National can loan out?
Answer: 2710.4
- Now, suppose that Financial National loans $1,500 to Gianluigi Buffon.
Fill out the blanks in the Financial National Bank’s T-account to reflect this transaction.
Show your calculation.
Financial National’s T-account:
| ASSETS | Liabilities |
| TR=369.4 | D=3080 |
| RR=369.4 | |
| Loan=2710.4 |
- As a result of this transaction, can Financial National continue loaning out money using Ronaldinho’s initial deposit?
Answer: NO
- Suppose Financial National and Humongous National are the only 2 commercial banks in the economy. The required reserve ratio is 12%.
Calculate by how much money supply in this economy can go up as a result of Leo Messi’s initial deposit of $3,500.
Show ALL STEPS of your calculations and the unit of account.
Answer: Money multiplier=1/ required reserve ratio=1/0.12=8.33
Total money supply=3500*8.33=29,166.67
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