1. The Bank of Nelson (BON) is a bank in the United States, with $8,000 cash in its vault, and $34,000 on deposit at the Federal Reserve (the Fed). The customers of the bank have on deposit $600,000 in checking accounts. The bank owns government securities worth $100,000 and has made loans totaling $490,000. The FED imposes a 7% required reserve ratio on this bank.

1. Put the assets and liabilities of the BON into a balance sheet using the T-account at right.

2. Calculate the banks
   1. actual reserves __________

1. 2. required reserves __________
2. 3. excess reserves __________
3. 3. By how much can this bank safely increase its loans? Explain!

1. 4. For each of the following transactions
2. 1. determine the immediate change in M1 (M1 is the money supply that is composed of currency, demand deposits, other liquid depositswhich includes savings deposits. ) and M2 (M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.)
   2. show the changes in the banks balance sheet
   3. calculate the amount by which the bank can safely increase its loans
   4. calculate the maximum change in total deposits in the banking system

1. The BON sells to the Fed $20,000 of government securities. (put into a T-account)

2. The Fed cuts the required reserve ratio to 5%. (put into a T-account)

2. Assume that the Federal Reserve has set the required reserve ratio [r] at 12%. Also assume that all deposits are checking accounts at banks. For each of the following transactions, show:

• the immediate effect on the banks balance sheet
• the amount by which the bank can safely increase its loans
• the maximum change in total deposits in the banking system
  1. Lucy deposits $2,000 cash into her checking account at Bank A. (put into a T-account)
  2. The Fed buys $800,000 of government securities from Bank B.(put into a T-account)

3. The Fed lowers its discount rate and as a result Bank C borrows $200,000 from the Fed. (put into a T-account)