PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 4RQ
To determine
Explain what is banking panic.
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Suppose the bank decides to invest 45 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at a different bank. What will ACME Bank's balance sheet look like after the check has been processed? Fill in the values in the table below. Assume a required reserve ratio of 10 percent. The balance sheet for ACME Bank is shown below.
Consider the following statements about interest rate risk assuming that banks have assets with longer maturities than liabilities. Which of the following statements are CORRECT?
Bank assets are generally more interest rate sensitive than liabilities so they are subject to greater duration risk.
Gap management is used by banks to limit the gap between asset and liabilities duration and hence remove interest risk on and off their balance sheet.
Banks may engage in gap management by securitising parts of their loan portfolio, thereby shifting interest rate risk to institutional investors purchasing the securitised packages.
Banks may use floating or variable rate mortgages to reduce the duration of their asset portfolio.
Chose 1 option from:
I, III and IV.
I, II and III.
I, II, III and IV.
II, III and IV.
I and IV.
Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. (LG 4-3)
If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.
Redo part (a) using a 12 percent reserve requirement.
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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