The World’s Best Bank (WBB) is the only bank in the country and its T-account is:...

The World’s Best Bank (WBB) is the only bank in the country and its T-account is:

Assets	(in $ million)	Liabilities	(in $ million)
Reserves	300	Deposits	600
Loans	200
Cash held in overseas banks	100	Debts	200
Securities	300	Capital (Owner's equity)	100

a) What is WBB’s reserve ratio? (1 mark)

b) What is the implied money multiplier? (1 mark)

c) What is WBB’s leverage ratio? (1 mark)

d) Suppose a foreign depositor withdraws $100 from his WBB account and transfers the funds to his overseas account. What happens to WBB’s reserve ratio? What happens to the money supply?

e) Going back to the original T-account (i.e. the withdrawal of part d. did NOT take place), Suppose that due to the mortgage crisis some people default on their loans, and their value thus decreases by 50. What happens to the leverage ratio (assuming the bank makes no changes in reserves)?

Solutions

Expert Solution

The World’s Best Bank (WBB) is the only bank in the country and its T-account is:

Assets	(in $ million)	Liabilities	(in $ million)
Reserves	300	Deposits	600
Loans	200
Cash held in overseas banks	100	Debts	200
Securities	300	Capital (Owner's equity)	100

A:- What is WBB’s reserve ratio?

Answer:- WBB’s reserve ratio =(reserve/deposit)*100= ($300/$600)*100 = 50%

B:- What is the implied money multiplier?

Answer:- money multiplier = 1/reserve ratio =1/0.5 = 2

C:- What is WBB’s leverage ratio?

Answer:- WBB’s leverage ratio= Total Assets /capital =$900/$100 =9

D:- Suppose a foreign depositor withdraws $100 from his WBB account and transfers the funds to his overseas account. What happens to WBB’s reserve ratio? What happens to the money supply?

Answer;- When the money is withdrawn by any foreign investor , it will result in the reduction of deposits and reserves by $100

New Deposits = $600-$100 = $500

New Reserves = $300-$100=$200

New Reserve Ratio=($200/$500)*100=40%

The money supply is reducing by $100.

E:- Going back to the original T-account (i.e. the withdrawal of part d. did NOT take place), Suppose that due to the mortgage crisis some people default on their loans, and their value thus decreases by 50. What happens to the leverage ratio (assuming the bank makes no changes in reserves)?

Answer:- Due to default on the loans to borrowers, there will be a reduction of the loan by $50.

New loans= $200-$50=$150

New Total Assets =$900-$50 =$850

New leverage = New total assets / capital =$850/$100 =8.5

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Rahul Sunny answered 1 year ago

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