Subject: macroeconomics

Question 3

Suppose that all commercial banks in Arora have zero excess reserves, and the public must keep their money in the bank. Fairytale Bank is one of the commercial banks in Arora. Fairytale Bank receives a cash deposit of $570,000 by Mr. Mufasa who opens up a new checking account. Assume that a required reserve ratio is 13 percent.

Based on the information given:

1. Construct a balance sheet for Fairytale Bank.
2. If the whole amount of the excess reserve in the Fairytale Bank is lent out to Mrs. Puff, who then deposited the money in the Lion King Bank, construct the balance sheet for the Lion King Bank. [Assume that the Lion King Bank holds no initial deposits.]
3. Calculate the total deposits, total reserves, and total loans created by this economy.

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