Question number 4

4. [A Look at Money, Ination and the Fed] The reserve requirement in the United States is 10%. Lion Bank has deposits of $15 million and currently has as low reserves as are possible (under the law). Lion Bank has $4 million in government bonds and has loaned out the remainder of its assets (that which is not kept as reserves). Bank of Valere has deposits of $8 million. It has the lowest reserves possible, and has loaned out $2 million. The rest of its assets (again, that which is not kept as reserves) is held in government bonds. For this entire problem, you may write numbers in militans (9.3. simply write \"2.5 \" instead of "2,500,000 \") a. Fill in the balance sheet table below for both banks Lion Bank Liabilities Bank of Valere Assets Liabilities Loans Deposits Bonds Reserves b. Now suppose the Fed purchases $2 million worth of government bonds from Lion Bank. Suppose Lion Bank does not make any adjustments to its reserves. Depict its balance sheet immediately after the Fed's purchase. Lion Bank Liabilities c. Now suppose Lion Bank adjusts its loans such that it is once again holding the minimum allowed amount of currency in reserves. To do so it lends out the money to Bell Industries. How much would it lend? Depict Lion Bank's balance sheet. Liabilities d. Suppose Bell Industries uses all the loan to purchase a very expense machine produced by Widgets Inc. Next, Widgets Inc. deposits all the money at Bank of Valere. Show Bank of Valere's new balance sheet immediately after Widgets Inc. deposits the money (before it changes its reserves to be at minimum). Bank of Valere Assets Liabilities Loans Deposits Bonds Reserves e. Now suppose Bank of Valere adjusts its reserves to be at the minimum again by increasing lending. How much would it lend out? Depict its balance sheet after it adjusts its reserves to be at the minimum. Bank of Valera Liabilities