This exercise is on the multiple contraction of the money supply resulting from open market sales of securities by the State Bank of Vietnam. Assume: (1) that the required reserve ratio = 20%; and (2) all commercial banks hold no excess reserves and (3) net worth is all banks is always zero so that assets = liabilities at all times. Suppose the State Bank of Vietnam sells two $30,000 bonds, one to Huong and one to Long. Huong pays for her bond with money she withdraws from her account at Vietcombank. Long pays for his bond with money he stored under his mattress This exercise is on the multiple contraction of the money supply resulting from open market sales of securities by the State Bank of Vietnam. Assume: (1) that the required reserve ratio = 20%; and (2) all commercial banks hold no excess reserves and (3) net worth is all banks is always zero so that assets = liabilities at all times. Suppose the State Bank of Vietnam sells two $30,000 bonds, one to Huong and one to Long. Huong pays for her bond with money she withdraws from her account at Vietcombank. Long pays for his bond with money he stored under his mattress

a. The following is Vietcombank's balance sheet before Huong withdraws $30,000 in cash. Complete the balance sheet.

Vietcombank: Balance Sheet

Asset				Liabilities
Reserves		?		Demand Deposits:
Loans		?		of Huong		60,000
Securities		40,000		of others		?
Total		400,000		Total		?

b. Show the impact of Huongs withdrawal on Vietcombank's balance sheet.

Vietcombank: Balance Sheet

Asset				Liabilities
Reserves		?		Demand Deposits:
Loans		?		of Huong		?
Securities		?		of others		?
Total		?		Total		?

c. At this point, by how much do Vietcombank's reserves fall short of the legal requirement?

d. Suppose Vietcombank replenishes its reserves by selling some of its securities to Minh (i.e. the bank sells Minh securities equal to the amount its reserves fall short). Minh has a checking account at the BIDV. Complete the BIDV's balance sheet before Minh purchases the securities.

The BIDV: Balance Sheet

Asset				Liabilities
Reserves		?		Demand Deposits:
Loans		190,000		of Minh		50,000
Securities		?		of others		600,000
Total		?		Total		?

e. Show what happens on Vietcombank's and The BIDV's balance sheets when Minh pays for those securities by giving Vietcombank a personal check drawn on his account at The BIDV, which Vietcombank turns over to The BIDV in exchange for cash.

Vietcombank: Balance Sheet

Asset				Liabilities
Reserves		?		Demand Deposits:
Loans		?		of Huong		?
Securities		?		of others		?
Total		?		Total		?

The BIDV: Balance Sheet

Asset				Liabilities
Reserves		?		Demand Deposits:
Loans		?		of Minh		?
Securities		?		of others		?
Total		?		Total		?

f. At this point, what is the decrease in the money supply, due only to the original sale of two bonds to Huong and to Long as well as the subsequent sale of Vietcombank's securities to Minh?

g. If the BIDV replenishes its shortage of reserves (caused by transactions described above) by selling some of its securities, how much must it sell?

h. What will be the ultimate decrease in the money supply resulting from this initial sale of two bonds by the State Bank of Vietnam?