Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central

image text in transcribed
Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 5 million identical paper notes, called guilders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 5 million guilders. In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank. Deposits do not earn interest in this economy. Let's suppose for now that people prefer bank deposits to cash and so deposit all of their guilders with the commercial banks. Assume that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation and (2) commercial banks desire to hold reserves of 20 percent of deposits. Assume that the public holds no currency. Instructions: Enter your responses as whole numbers. a. The consolidated balance sheet of Gorgonzolan commercial banks after the initial deposits is Initial balance sheet Liabilities Assets Deposits Currency b. The consolidated balance sheet of Gorgonzolan commercial banks after one round of loans is Balance sheet after first round of loans Liabilities Assets Deposits Currency (- reserves) Loans c. The consolidated balance sheet of Gorgonzolan commercial banks after the first redeposit of guilders is: Bolance sheet after redeposits Liabilities Assets Deposits Currency ( reserves) Loans

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

IFRS edition volume 2

978-0470613474, 470613475, 978-0470616314

More Books

Students also viewed these Accounting questions

Question

Understanding of the different individuals and their background

Answered: 1 week ago