Question

In: Economics

Suppose Leo Messi deposits $3,500 cash in the Humongous National Bank. The required reserve ratio in...

  1. Suppose Leo Messi deposits $3,500 cash in the Humongous National Bank. The required reserve ratio in this economy is 12%.
    1. 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=
  1. As a result of Leo Messi’s deposit, what is the maximum amount (in $) that Humongous National can loan out?

Answer:   

  1. 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=
  1. 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

  1. 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:

  1. As a result of Ronaldinho’s transaction, what is the maximum amount (in $) that Financial National can loan out?

Answer:   

  1. 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=
  1. 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

  1. 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

  1. 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
  1. 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

  1. 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
  1. As a result of this transaction, can Humongous National continue loaning out money using Leo Messi’s initial deposit of $3,500?

Answer: NO

  1. 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:

  1. As a result of Ronaldinho’s transaction, what is the maximum amount (in $) that Financial National can loan out?

Answer: 2710.4

  1. 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
  1. As a result of this transaction, can Financial National continue loaning out money using Ronaldinho’s initial deposit?

Answer: NO

  1. 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

Rahul Sunny answered 1 year ago
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