1. The simplified T-account (balance sheet) for Zenith Bank in the country of Everland is shown below. Assume the reserve requirement in Everland is 20 percent. Assets Liabilities Reserves $80 million Deposits $200 million Loans 160 million Net worth 40 million (Owners' equity) a. Calculate the maximum amount by which Zenith Bank can increase its loans. b. Based on your answer in part (a), calculate the maximum possible increase in Everland's money supply. C. Identify one reason that Everland's money supply may expand by a smaller amount than the amount you identified in part (b). d. Assume the central bank of Everland purchases $10 million in government securities from the public. If the public deposits the $10 million in Zenith Bank, by how much will Zenith Bank's required reserves change as a result of the new deposit? .What will happen to the price of bonds as a result of the central bank's purchase of government securities described in part (d) ? 2. Sewell Bank has the simplified balance sheet below. Assets Liabilities Required reserves $2.000 Demand deposits $10.000 Excess reserves SO Owner's equity $10,000 Customer loans $8.000 Government securities (bonds) $7.000 Building and fixtures $3.000 a. Based on Sewell Bank's balance sheet, calculate the required reserve ratio. b. Suppose that the Federal Reserve purchases $5,000 worth of bonds from Sewell Bank. What will be the change in the dollar value of each of the following immediately after the purchase? i. Excess reserves ii. Demand deposit C. Calculate the maximum amount that the money supply can change as a result of the $5,000 purchase of bonds by the Federal Reserve. d. When the Federal Reserve purchases bonds, what will happen to the price of bonds in the open market? Explain. e. Suppose that instead of the purchase of bonds by the Federal Reserve, an individual deposits $5,000 in cash into her checking (demand deposit) account. What is the immediate effect of the cash deposit on the M1 measure of the money supply? 3. Assume that the reserve requirement is 20 percent and banks hold no excess reserves. Assume that Kim deposits $100 of cash from her pocket into her checking account. Calculate each of the following. i. The maximum dollar amount the commercial bank can initially lend ii. The maximum total change in demand deposits in the banking system ifi. The maximum change in the money supply b. Assume that the Federal Reserve buys $5 million in government bonds on the open market. As a result of the open market purchase, calculate the maximum increase in the money supply in the banking system. 4. The following is the balance sheet of First Superior Bank. Assets Liabilities and Equity Reserves $200 Demand deposits 82,000 Loans $1,800 Equity (net worth) SD a. Assume that the required reserve ratio is 10 percent. b. What is the dollar value of new loans that First Superior Bank can make? Explain
