Answered: Transaction One: Open a Bank and Accept…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter19: The Macroeconomic Perspective

Section: Chapter Questions

Problem 30P: A mortgage 105m is a loan that a person makes to purchase a house. Table 19.11 provides a list of...

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Transaction One: Open a Bank and Accept Deposits

Name your Bank

Draw a T-Account Representing Deposits of $2 million

Transaction Two: Grant a Loan

The Reserve Requirement is 20%

Customer A wants to borrow $1 million. Customer B wants to borrow $400,000. Customer C wants to borrow $300,000. Can you fulfill all three loan requests?

Draw a T-Account Representing a bank that is fully “loaned up” (reduce the loan amount to Customer C if necessary)

Transaction Three: Follow the Money Creation Process

Customer A deposits his loan with his home bank, Bank of Taylor

Draw a T-Account Representing this transaction for Bank of Taylor assuming they already have $1.5 million in deposits and loans in the amount of $700,000

Transaction Four: Calculate the Money Creation Effect

What is the money multiplier rate in this example?

If banks in this economy are always fully loaned up, calculate how much money was created in this economy from the original three loans made by your bank (the amount that represents the bank’s total excess reserves).

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Transaction One: Open a Bank and Accept Deposits
Name your Bank
Draw a T-Account Representing Deposits of $2 million
Transaction Two: Grant a Loan
The Reserve Requirement is 20%
Customer A wants to borrow $1 million. Customer B wants to borrow $400,000. Customer C
wants to borrow $300,000. Can you fulfill all three loan requests?
Draw a T-Account Representing a bank that is fully "loaned up" (reduce the loan amount to
Customer C if necessary)
Transaction Three: Follow the Money Creation Process
Customer A deposits his loan with his home bank, Bank of Taylor
Draw a T-Account Representing this transaction for Bank of Taylor assuming they already have
$1.5 million in deposits and loans in the amount of $700,000
Transaction Four: Calculate the Money Creation Effect
What is the money multiplier rate in this example?
Collaborate
ab
Format Document

View
125% ✓
Zoom
+
Add Page
+=
Insert
Table
Name:
C
+
A
m
Text Shape Media Comment
Transaction Four: Calculate the Money Creation Effect
What is the money multiplier rate in this example?
If banks in this economy are always fully loaned up, calculate how much money was created in
this economy from the original three loans made by your bank (the amount that represents the
bank's total excess reserves).
Collaborate
ab
Format Document

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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