TASK 14 c)
Please consider a banking system consisting of a central bank and three commercial banks (Bank A, B and C). The balance sheets of the three commercial banks are presented below. Currency in circulation amounts to 500. Besides loans to the banking sector, the central bank only holds securities as assets. Bank A Liabilities Deposits Borrowings from the central bank 25 Assets Reserves Securities 85 Loans 200 200 60 50 Bank B Liabilities Deposits Borrowings from the central bank Assets Reserves Securities 200 Loans 500 400 300 Borrowings from Bank A 50 LTTI Assets Reserves Securities Loans Bank C Liabilities 20 Deposits 130 Borrowings from the central bank 350 Borrowings from Bank A and B 160 150 100 a) Present the balance sheets of the banking system as a whole and the balance sheet of the central bank. b) Next, determine the size of the monetary base and the size of the money supply (MI). c) Assume that banks do not hold excess reserves. Use the answers under a) and b) to determine the required reserve ratio (r) and the (maximum) deposit creation multiplier (please round to two decimals). Also explain why, in practice, the multiplier might be lower. d) How would the balance sheets of the central bank and the banking system change (present the new balance sheets) after: 1) a sale of of securities by the central bank to the banking sector (disregard the required reserve ratio for this scenario) and 2) (Using the balance sheet you just modified) the central bank setting the required reserve ratio to 0.15, still assuming tha banks do not hold excess reserves? Assum the banking system will sell securities to meet this new reserve requirement, and disregard the effect of the money multiplier. What would be the motivation of the central bank to sell securities and what would be the motivation to raise the required reserve ratio? e) Now assume that banks wish to hold excess reserves amounting to 27 in the situation under d), (the required reserve ratio remains at 0.15). Determine the so-called currency ratio (c), the Please consider a banking system consisting of a central bank and three commercial banks (Bank A, B and C). The balance sheets of the three commercial banks are presented below. Currency in circulation amounts to 500. Besides loans to the banking sector, the central bank only holds securities as assets. Bank A Liabilities Deposits Borrowings from the central bank 25 Assets Reserves Securities 85 Loans 200 200 60 50 Bank B Liabilities Deposits Borrowings from the central bank Assets Reserves Securities 200 Loans 500 400 300 Borrowings from Bank A 50 LTTI Assets Reserves Securities Loans Bank C Liabilities 20 Deposits 130 Borrowings from the central bank 350 Borrowings from Bank A and B 160 150 100 a) Present the balance sheets of the banking system as a whole and the balance sheet of the central bank. b) Next, determine the size of the monetary base and the size of the money supply (MI). c) Assume that banks do not hold excess reserves. Use the answers under a) and b) to determine the required reserve ratio (r) and the (maximum) deposit creation multiplier (please round to two decimals). Also explain why, in practice, the multiplier might be lower. d) How would the balance sheets of the central bank and the banking system change (present the new balance sheets) after: 1) a sale of of securities by the central bank to the banking sector (disregard the required reserve ratio for this scenario) and 2) (Using the balance sheet you just modified) the central bank setting the required reserve ratio to 0.15, still assuming tha banks do not hold excess reserves? Assum the banking system will sell securities to meet this new reserve requirement, and disregard the effect of the money multiplier. What would be the motivation of the central bank to sell securities and what would be the motivation to raise the required reserve ratio? e) Now assume that banks wish to hold excess reserves amounting to 27 in the situation under d), (the required reserve ratio remains at 0.15). Determine the so-called currency ratio (c), the
