Question

In: Economics

B. Using the table below, create the balance sheet of MaineBank assuming the following information (in...

B. Using the table below, create the balance sheet of MaineBank assuming the following information (in millions $$): Reserves = $360, Loans = $1,240, Deposits = $1,800, Debt = $150, Securities = $400, Capital (owner’s equity) = $50. What is the reserve-deposit ratio assuming all reserves are required reserves? What is the leverage ratio? Show your work/calculations. (10 points)

MaineBank Balance Sheet

Assets	Liabilities & Owner’s Equity
Reserves	Deposits
Loans	Debt
Securities	Capital (Owners’ equity)
Total	Total

Reserve deposit ratio =

Leverage ratio =

C. The monetary base of Moneyland is $700 million. The current-deposit ratio (cr) is 0.2 and reserve-deposit ratio (rr) is 0.2. Calculate the money multiplier and money supply. Show your work. (5 points each)

Money Multiplier =

Money Supply =

D. The Federal Reserve's tools to control the money supply include: open-market operations, the reserve-deposit ratio, the discount rate, and interest payments on reserves. How should each instrument be changed if the Fed wishes to increase the money supply? An example is provided. (6 points)

TOOL	TYPE OF CHANGE
Reserve-deposit ratio (rr)	Decrease rr (example)
Open-market operations
Discount rate
Interest on reserves

Expert Solution

B) Following is the balance sheets and financial Ratio's of Mainebank:

C)

D) Impact on reserve ratio : When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation's money supply and expands the economy.

Impact on open market operations : In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply.

Impact on discount rate : When the Fed lowers the discount rate, this increases excess reserves in commercial banks throughout the economy and expands the money supply hence if money supply increases its will reduce the discount rartes.

Impact on interest of reserves : Increasing the money supply also increase the interest rate, which discourages lending and investment.

Rahul Sunny answered 2 years ago

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