Information for Question 2A and 2B * Baseline: Suppose Happy Bank gets 1000 dollars as deposits, keeps 10% in reserves complying with the Federal Reserve directives, has 350 dollars worth of government bonds & its Net Worth (also known as Bank Capital) is equal to 0. * New Scenario: Starting from the baseline, Happy Bank for whatever reason starts holding 400 in reserves; but its Net Worth Remains at 0. * The next two slides contain the same information in a T account form Baseline Liabilities Values Bank Capital = Net Worth Reserves 10% of Deposits (or $1000 Total Assets Deposits Money Base) -Total Liabilities =50 Bonds $350 Loans 77?7 Total Assets 5?77 Total Liabilities $1000 Bank Capital = Assets Liabilities = 0 Assets = Liabilities Fed: 10% in reserves Excess Reserves =77-77=177 Effective Reserves 77 i i - = =17 Ef fective Reserve Ratio(ERR) Depostt 7717 % 1 1 =77 Ef fective Money Multiplier (EMM) = TRR-77% = Effective Money Supply = Money Base x EMM =?7x?7=7127? New Scenario Values Liabilities Bank Capital = L AT 4] Reserves Deposits (or $1000 Total Assets Money Base) -Total Liabilities = s Bonds 5350 Loans 577? Total Assets 5?77 Total Liabilities $1000 Bank Capital = Assets Liabilities = 0 Assets = Liabilities Fed: 10% in reserves Excess Reserves =77 ? 7=7? el PR R B e Effective Reserve Ratio(ERR) Deposit % 1 1 Ef fective Money Multiplier (EMM) = ERR = 77% =27 Effective Money Supply = Money Base Xx EMM =77x??=777 Question 2A (7 points) Use the information in the slides above and answer the following questions i. Calculate the loans given by the bank in the new scenario. Is this number greater or less than the baseline? Why? ii. Calculate the excess reserves in the new scenario. Is this number greater or less than the baseline? Why? iii. Calculate the money multiplier in the new scenario? Is this number greater or less than the baseline? Why? iv. Calculate the money supply in the new scenario? Is this number greater or less than the baseline? Why