Description
do on excel form
Unformatted Attachment Preview
Purchase answer to see full attachment
Explanation & Answer
Attached.
figures in $ millions.
Assets
Reserves
Loans
Liabilities
75 Deposits
525 Bank capital
500
100
total
600
600
required reserve = m × demand deposits
reserve = 12% × 500million
reserve = 60 million.
bank capital = (reserve+loans-deposits)
bank capital = 75+525-500 = 100 million.
the bank has met the required reserve requirement.
excess reserve = reserve - required reserve
excess reserve = 75-60
excess reserve = 15million.
Assets
Reserves
Loans
Liabilities
54 Deposits
525 Bank capital
450
129
total
579
579
if the customers withdraw 50million worth od deposits, the deposit balance will be = 500-50=450 million.
reserve = m × demand dedosits
reserve = 12% × 450 million.
reserve = 54 million.
the bank can still amange to meet the required reserve of 60 million by adjusting its demand deposits.
the required amount to meet the required reserve = 60 million - 54 million
shortfail = 6million.
the size of the shortfail = deficit reserve/ m
size of the shortfail = 6million/ 0.12
size of the shortfail = 50million.
in sellecting the option to correct the shortfail, we select the option which gives rise to the least effect on the banks balance s
we begin by getting the bank's multiplier
required reserve = 60
bank's reserve = 54
m = 54/60
m = 0.9
multiplier = 1/m
multplier = 1/0.9= 1.11%
from these we will now get the option which is below 1.11%.
option 1; borrowing from the fed at a rate of 1.25% will have an increamental cost on the bank equivalent to = 1.25-1.11 = 0.
option 2; selling $20 million worth of loans will increase the demand depos...