VI. A Balance Sheet Question a little tough, but give it a try! Suppose that Smallvilles banking system has the following balance sheet:

Assets:

Liabilities: Deposits: $100

Net Worth = Assets Liabilities = $50

The reserve ratio is 5%. No one uses currency in Smallville.

1. a) What is the level of required reserves and excess reserves held by banks in Smallville?

2. b) What is the money supply in Smallville? What would the money supply be in Smallville if banks held zero excess reserves? (Hint: Think about what the meaning of the money multiplier.)

3. c) Suppose that the Central Bank of Smallville (Small Bank) injects $1 into the banking system via open market operations. Write down the banking systems balance sheet immediately (two seconds) after open market operations have been completed.

4. Assets:

   Liabilities: Deposits: $100

   Net Worth = Assets Liabilities = $50

Reserves: $10 Loans: $100 Bonds: $40

Reserves: $10 Loans: $100 Bonds: $40

d) What is the money supply after banks respond to the injection of reserves in (c ) by altering the amount of lending they do?