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The following problem is designed to help you see how a fractional reserve bridne system functions in an economy where there is a central bank

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The following problem is designed to help you see how a fractional reserve bridne system functions in an economy where there is a central bank that purchases and sells government securities to influence bank robertos. Suppose the legal reserve requirement for checkabla deposita is 10 percent and the from public (non-bank) individuals and institutions. The Ped pays for these securities by checks which are deposited by these individuals and Institutions in bank checking accounta. The impact is shown below. Central Bank (the Yed) Non-hank public 0.9. securities +100 Ban rosorves +100 U.S. Becurities 100 Checkable Doponita -100 Commerciol Banks Bank reserves +100 Checkoble deposits +100 Illustrate the impact of the above event through four generations of banks in the following "T" accounta. First Generation Commercial Banks Required reserves Checkable deposits Loans and investments If this same process continges show the final positions for the balance sheets of the second third and fourth generation banks. Second Generation Commercial Banks Required reserves Checkable deposita Loons and investments Third Generation Commercial Banks Checka ble deposits Required reserves Loans and investments Fourth Generation Conmercial Banks Checkable deposits Required reserves Loans and investments After the process has run its course the total effect on the commercial banking system ( including the initial deposit) would be as follows: Commercial Banks Checkable deposits Required reserves Loans end investments (OVER) Non-bank Public U.S. securities Checka ble deposits Loans and investments financed by borrowing Finally the total effect on the Fed would be: Federal Reserve Banks U.S. securities Bank reserves How much money was created by the Federal Reserve Bank? How much money was created by the fractional reserve bankdng system? In order for the above impact to have been realized what conditions or assumptions must be met? The following problem is designed to help you see how a fractional reserve bridne system functions in an economy where there is a central bank that purchases and sells government securities to influence bank robertos. Suppose the legal reserve requirement for checkabla deposita is 10 percent and the from public (non-bank) individuals and institutions. The Ped pays for these securities by checks which are deposited by these individuals and Institutions in bank checking accounta. The impact is shown below. Central Bank (the Yed) Non-hank public 0.9. securities +100 Ban rosorves +100 U.S. Becurities 100 Checkable Doponita -100 Commerciol Banks Bank reserves +100 Checkoble deposits +100 Illustrate the impact of the above event through four generations of banks in the following "T" accounta. First Generation Commercial Banks Required reserves Checkable deposits Loans and investments If this same process continges show the final positions for the balance sheets of the second third and fourth generation banks. Second Generation Commercial Banks Required reserves Checkable deposita Loons and investments Third Generation Commercial Banks Checka ble deposits Required reserves Loans and investments Fourth Generation Conmercial Banks Checkable deposits Required reserves Loans and investments After the process has run its course the total effect on the commercial banking system ( including the initial deposit) would be as follows: Commercial Banks Checkable deposits Required reserves Loans end investments (OVER) Non-bank Public U.S. securities Checka ble deposits Loans and investments financed by borrowing Finally the total effect on the Fed would be: Federal Reserve Banks U.S. securities Bank reserves How much money was created by the Federal Reserve Bank? How much money was created by the fractional reserve bankdng system? In order for the above impact to have been realized what conditions or assumptions must be met

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