Question

1. Calculate the required reserve ratio. (Show your work) 2. Assume that Pam wants to borrow money to pay for a new car from Sharpeland Bank. a. What is the maximum amount that Sharpeland Bank can loan out if it wants to keep all of its bonds? b. What is the maximum amount that the banking system can create given the balance sheet above? 3. Assume instead that Michael withdraws $10,000 in cash from his checking account at Sharpeland. a. By how much will Sharpeland Bank’s reserves change based on Michael’s withdrawal? (Be specific.) b. What is the immediate effect of the withdrawal on the M1 measure of the money supply? Explain. c. As a result of the withdrawal, what is the new value of excess reserves for Sharpeland Bank based on the reserve requirement from part (a)?

Answer 1

Answer:

From the given problem statement we need to calculate the reserve ratio

Withdraws amount=$1000

Using F=P(1+i)^n

where  n is the no of the years

i is the interest rate

The future value=$2344.898

So this is the maximum amount

Answer 2

Answer:

The reserve ratio is the amount that is set by the regulatory authority for the bank for maintaining the minimum amount of cash as in the liquid form with the commercial banks before paying off as loans or other use.

Explanation:

1. The required reserve ratio is computed as follows:

Given information:

Required reserves = $40,000

Checkable deposits =$200,000

$\begin{aligned}\text{Reserve ratio}&=\frac{\text{Required Reserves}}{\text{Checkable Deposit}}\times100\\&=\frac{\ 40,000}{\ 200,000}\times100\\&=20\%\end{aligned}$

So, the reserve ratio is 20%.

2.

a. The maximum amount that can be loaned is:

$25,000

Reason: The maximum amount that the bank can loan must be equal to the amount in excess of the reserves, that is $25,000.

b. Maximum amount that the bank can create is:

$\begin{aligned}\text{Maximum amount} &= \text{Excess Amount}\times\frac{1}{\text{Required Reserve Ratio}}\\ &=\ 25,000\times\frac{1}{0.20}\\&=\ 125,000\end{aligned}$

3.

a. Sharpeland Bank's reserve will decrease by $10,000 each.

Reason: The cash withdrawn is $10,000 from his checking account, then the withdrawal will also reduce with the amount equal to the checkable amount.

b. The immediate effect of the withdrawal on M1 measure for the money supply will be:

Cash will increase by $10,000, and another component that is checkable deposit will decrease by $10,000.

Thus, there would be no immediate change in the M1 measure.

c. The new value of the excess reserves is:

First, the required reserve to be maintained is computed as:

$\begin{aligned}\text{Required reserve to be maintained}&=\text{New Checkable Deposit}\times\text{Requires Reserve ratio}\\&=\ 190,000\times0.20\\&=\ 38,000\end{aligned}$

The excess reserve is computed as:

$\begin{aligned}\text{Excess reserve}&=\text{Total Reserve}-\text{Required Reserve}\\&=\ 55,000-\ 38,000\\&=\ 17,000\end{aligned}$

Thus, the new value of excess reserve for Sharpeland Bank is $17,000.

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