Question
Table A belowshows abbreviated balance sheets for the central bank in the country of Beckland and B shows tables for its whole commercial banking system.
Table A belowshows abbreviated balance sheets for the central bank in the country of Beckland and B shows tables for its whole commercial banking system. The target reserve ratio for the banks is 8 percent. (All figures are in billions of dollars.) a. Suppose that the Bank of Beckland buys $2 billion of government securities (T-bills) from the commercial banks. Show the immediate effects of this transaction on the balance sheets in column (1) of Tables A and B.
A) Central Bank of Beckland | |||||
Assets | (1) | Liabilities | (1) | ||
Treasury bills | $200 | $ | Notes in circulation | $193 | $ |
Short-term loans to banks | 10 | Government deposits | 8 | ||
Deposits of banks | 9 |
B) Beckland's Banking System | |||||||
Assets | (1) | (2) | Liabilities | (1) | (2) | ||
Reserves: | Deposits | 200 | |||||
in vaults | 7 | ||||||
in Bank of Beckland | 9 | ||||||
Securities | 35 | Short-term loans from Bank of Beckland | 10 | ||||
Loans to customers | 165 | Equity | 6 |
b. What effect does this transaction have on the money supply of Beckland? Money supply
. c. What effect does the transaction have on the banking system's excess reserves? Banks become
by $ billion. d. If the banks were to fully loan-up, show the result in column (2) of the banking system's balance sheet. To answer this question, complete the column (2) in the above table. Round your answers to the nearest whole number. e. By how much has money supply now changed? Round your answers to the nearest whole number.
Change in money supply +/ of $ billion.
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