Question
Macroland citizens put $5,000,000 into commercial banks. Suppose initially all commercial banks maintain the 100% reserve banking system and the consolidated balance sheet of Macroland
Macroland citizens put $5,000,000 into commercial banks. Suppose initially all commercial banks maintain the 100% reserve banking system and the consolidated balance sheet of Macroland commercial banks looks like the following:
ASSETS | LIABILITIES |
Currency reserve 5,000,000 | Deposits 5,000,000 |
Q1: Suppose the banks want to maintain a 20 percent ratio of reserves to deposits. Then what will be their new balance sheet or how should their new consolidated balance sheet will look like? Please show the Balance Sheet Table.
Q2: What will happen if the loaned-out funds are redeposited to the commercial banks? How will this redeposited amount change the balance sheet? Please show the Balance Sheet Table.
Q3: If the banks continue to maintain a 20% reserve to deposit ratio and loaned out the excess amount, how their final balance sheet should look like? Please show the Balance Sheet Table.
Q4: Suppose Macroland citizens put $5,000,000 into commercial banks and hold $1,000,000 cash on hand. Commercial banks maintain a 20% reserve to deposit ratio. What will be the total money supply eventually? Please show me your math calculations.
Q5: Suppose Federal Reserve Bank wants to increase the money supply in the economy to make faster economic growth in the short run. The current reserve to deposit ratio in the commercial bank is 20%. Fed has hired you as a professional economist. Will you suggest Fed to increase the reserve to deposit ratio of commercial banks to 30% or will you suggest Fed to reduce the reserve to deposit ratio of commercial banks to 10%? Please explain your answer that why have you made that suggestion?
Please answer questions and state answers clearly! Thank you!!
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