Question 1: Fractional-Reserve Banking (19 Points) For Question #1 (a) -(e) you may assume the following: (1) Banks do not hold any excess reserves. Any excess reserves is used to make real estate loans (2) Households do not hold any currency. All funds that are received are deposited. Suppose Harvest Community Bank only liabilities are checkable deposits and bank capital and it has only 2 assets: required reserves and loans. The balance sheet for the Harvest Community Bank is illustrated below. Balance Sheet: Harvest Community Bank Assets Liabilities Required Reserves: Checkable Deposits: $1,400 million Loans $1176 million Bank Capital: $56 million (a) Calculate the amount of required reserves (RR) and the required reserve ratio (rr). [3 Points] (b) Suppose that the Fed makes an open-market purchase of 88 million by buying $8 million worth of government securities from Ms. Walton. The Fed pays Ms. Walton with a 58 million check, which Ms. Walton takes to her bank, Harvest Community Bank and deposits into her checking account. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Harvest Community Bank [4 Points] (e) Suppose that Harvest Community Bank lends out the funds found in Part(b) to Fred who uses the proceeds to purchase a 10 bedroom mansion from Mr. Khan. Mr. Khan deposits the proceeds into his checking account at Premier Bank. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Premier Bank. [4 Points] Page 1 of 3 (d) Suppose that Premier Bank lends out the funds found in Part (c) to Daisy who uses the proceeds to purchase tractors from Deere Corporation. Deere Corporation deposits the proceeds into its checking account at Highland Community Bank. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Highland Community Bank. [4 Points] (e) What will be the total change in the money supply as a result of the open-market purchase of $8 million by the Federal Reserve? Assume the required reserve ratio is the ratio calculated from Part (a). [4 Points) Question 1: Fractional-Reserve Banking (19 Points) For Question #1 (a) -(e) you may assume the following: (1) Banks do not hold any excess reserves. Any excess reserves is used to make real estate loans (2) Households do not hold any currency. All funds that are received are deposited. Suppose Harvest Community Bank only liabilities are checkable deposits and bank capital and it has only 2 assets: required reserves and loans. The balance sheet for the Harvest Community Bank is illustrated below. Balance Sheet: Harvest Community Bank Assets Liabilities Required Reserves: Checkable Deposits: $1,400 million Loans $1176 million Bank Capital: $56 million (a) Calculate the amount of required reserves (RR) and the required reserve ratio (rr). [3 Points] (b) Suppose that the Fed makes an open-market purchase of 88 million by buying $8 million worth of government securities from Ms. Walton. The Fed pays Ms. Walton with a 58 million check, which Ms. Walton takes to her bank, Harvest Community Bank and deposits into her checking account. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Harvest Community Bank [4 Points] (e) Suppose that Harvest Community Bank lends out the funds found in Part(b) to Fred who uses the proceeds to purchase a 10 bedroom mansion from Mr. Khan. Mr. Khan deposits the proceeds into his checking account at Premier Bank. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Premier Bank. [4 Points] Page 1 of 3 (d) Suppose that Premier Bank lends out the funds found in Part (c) to Daisy who uses the proceeds to purchase tractors from Deere Corporation. Deere Corporation deposits the proceeds into its checking account at Highland Community Bank. Assume the required reserve ratio is the ratio calculated from Part (a). Illustrate this transaction using a T-account for Highland Community Bank. [4 Points] (e) What will be the total change in the money supply as a result of the open-market purchase of $8 million by the Federal Reserve? Assume the required reserve ratio is the ratio calculated from Part (a). [4 Points)
