Assume the Bank of Smallville opens its doors to depositors and receives $100,000 incash deposits.a) Prepare a balance sheet for Bank of Smallville based on the above information.b) Assume furthermore that the bank has to abide by a 20% reserve ratio. How muchin excess reserves does the bank hold? Could this bank make a loan in the amountof $90,000? Briefly explain.c) Based on the amount of excess reserves, if the bank makes the loans, show theimmediate impact on the Bank of Smallville's balance sheet.d) Calculate value of the money multiplier?e) How much money would be created in the banking system if other banks also lendas much as possible?Part Ba) What is meant by the term "excess supply of money?" How does the money marketresolve this disequilibrium?b) Explain with diagrams, what happens to the money supply, interest rates,investment spending and GDP when the central bank makes open market purchases.

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Answered: Assume the Bank of Smallville opens its…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenue-producing investments, together with annual rates of return, are as follows: The credit union will have 2 million available for investment during the coming year. State laws are credit union policies impose the following restrictions on the composition of the loans and investments: Risk-free securities may not exceed 30% of the total funds available for investment. Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans). Furniture loans plus other secured loans may not exceed the automobile loans. Other secured loans plus signature loans may not exceed the funds invested in risk-free securities. How should the 2 million be allocated to each of the loan/investment alternatives to maximize total annual return? What is the projected total annual return?
Beleaguered State Bank (BSB) holds $200,000,000 in deposits and maintains a reserve ratio of 10%, which also is the reserve requirement. On paper, write the T account for BSB and use it to answer the rest of this question. Now suppose that BSB's largest depositor withdraws $10,000,000 from her account one day. On paper, show the effect of this on the T account. How many dollars of cash reserves does BSB need to raise to be allowed to open for business the next morning?
Old Bank started its first day of operations (11 March, 2021) with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $30 million commercial loan and another $30 million in mortgages. (a) If required reserves are 8%, what does the bank balance sheets look like?
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $750,000 from Lorenzo, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Juanita, who immediately…
Old Bank started its first day of operations (11 March, 2021) with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $30 million commercial loan and another $30 million in mortgages. (b) On the first day of operation (11 March, 2021), Clive withdraw his checkable deposits $40 million with the Old Bank. What does the balance sheet look like? Are there any problems?
Normanby Bank has the following balance sheet. Assets ($ million) Liabilities and equity ($ million) Treasury notes 85 Deposits 125 Loans 115 Interbank funds 55 Equity 20 Total assets 200 Total liabilities and equity 200 One of Normanby Bank’s wholesale customers decides to make an immediate deposit withdrawal of $15 million. To fund this withdrawal request, the bank adopts a liability liquidity management approach via the interbank funds market. Which of the following statements is CORRECT? Select one: a. After the transactions, the bank has 140m in deposits, 40m in interbank funds, and total assets remain unchanged. b. After the transactions, the bank has 110m in deposits, 40m in interbank funds, and 170m in total assets. c. After the transactions, the bank has 125m in deposits, 70m in interbank funds, and 215m in total assets. d. After the transactions, the bank has 110m in deposits,…
Assume that Jill deposits $20,000 in cash into her checking account at Welcome National Bank and the central bank has set a required reserve ratio of 10%. Explain the immediate effect of her deposit on the M1 measure of the money supply. If Welcome National Bank holds an additional 10% of her deposit in reserves, calculate the following: the maximum amount the bank will loan out the maximum increase in the money supply as a result of this transaction
Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,000,000. Lonergan needs approximately $610,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives: Borrow $610,000, sign a note payable, and assign the entire receivable balance as collateral. At the end of each month, a remittance will be made to the bank that equals the amount of receivables collected plus 12% interest on the unpaid balance of the note at the beginning of the period. Transfer $660,000 of specific receivables to the bank without recourse. The bank will charge a 3% factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met. Required:1. Prepare the journal entries that would be recorded on July 1 for: a. alternative a. b. alternative b. 2. Assuming that…
Imagine that the banking system's balance sheet can be represented by the following t-account: Assets LIABILITIES AND NET WORTH RESERVES 200 DEPOSITS 2000 BONDS 800 LOANS 1000 NETWORTH 0 TOTAL 2000 TOTAL 2000 Assuming the bank is "loaned up" the required reserve ratio is ___________ (round to two decimal places) The money multiplier is ___________ Imagine that the central bank uses open market operations to buy $300 worth of bonds from the bank above. Fill in the following t-account assuming that the money multiplier has taken its full effect: ASSETS LIABILITIES AND NET WORTH RESERVES __?___ DEPOSITS ___?__ BONDS ____?___ LOANS ____?____ NET WORTH ___?___ TOTAL _____?______ TOTAL ___?___
Suppose that the company has a balance sheet as follows at the beginning of the year. In that single year, the following transactions occur. One of the customers pays his $1,400 amount of debt by check. The company immediately pays its $1,200 amount of debt by endorsing these checks. After a while, another customer pays $900 cash for an outstanding debt. The company deposits $800 of this amount to its bank. Then, the company decides to pay one half of its debts via EFT(electronic funds transfer), and the other half of its debts by issuing its own checks. Lastly, the payee cashes these checks from the bank. Assuming that there are no more transactions throughout the year, what would be the total asset at the end of that year?
Assuming an economy have only two commercial banks in it banking system, Classic Bank and Prudent Bank. The following shows the balance sheet of the two banks as at 2019.Classic BankBalance sheet as at December, 2019GHSm GHSmAssets: Liabilities & Equity:Reserves 1,000 Deposits 3,000Securities 2,000 Equity 7,000Loans & Advances 1,000Property, Plant and Equipment 6,000 .10,000 10,000Prudent BankBalance sheet as at December, 2019GHSm GHSmAssets: Liabilities & Equity:Reserves 600 Deposits 2,500Securities 1,500 Equity 4,400Loans & Advances 800Property, Plant and Equipment 4,000 .6,900 6,900Assume a required reserve ratio of 10%.(a) What is the amount of excess reserves in this commercial banking system?…………………………….………………………………………………………………………………………………………………………………………………….……………………………………..……………………………………………………………………………….…………………………………………………………………………………………………………………………………………………(b)What is the maximum amount that the money supply can be expanded?What would be the effect of a fall in…

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