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ECON202 Ocean County College Fractional Reserve Banking System Questions

PRINCIPLES OF MACROECONOMICSHi, I have a Home Work that needs to be done20 easy questions

Fractional Reserve Banking System
• Q1: True or False:Paper bills and coins in the vault of a bank are part of the money supply.
• Q2: True or False:Paper bills and coins in the cash register of a local business, my wallet, or my wife’s
purse are part of the money supply.
• Q3: True of False:The amount of money that I have in my checking account is part of the money
supply.
• Q4: True of False:The money supply increases when banks make loans.
• Q5: The money supply is defined as:
1
Bank Balance Sheet
The following balance sheet is for Morgantown Bank (MB). MB takes deposits and makes
It holds
loans.
reserves as cash in the vault.
Assets
Liabilities
Reserves:$60 Deposits:$600
Loans:$540
• Q1: What is the reserve ratio of MB?
reserves
• Q2: Can you determine the reserve requirementrequired
ratio
for MB based on the information
deposits
above?
• Q3: If the reserve requirement ratio is 0.1, what amount of loans can MB make?
• Q4: If the reserve requirement ratio is 0.05, what amount of loans can MB make?
• Q5: Does MB operate in a fractional reserve banking system? Why or why not?
2
National Bank Balance Sheet
The following balance sheet is for United States Bank (USB). USB is the only bank in theUSB
country.
takes deposits and makes loans.
It holds reserves as cash in the vault.
Assets
Liabilities
Reserves:$160 Deposits:$800
Loans:$640
• Q1: Suppose there is no cash in the hands of the non-bank public.
What is the money supply based on
the information above?
• Q2: What is the reserve ratio of USB?
• Q3: If the reserve requirement ratio is what
0.1, is the largest loan amount that USB can make to
Smash Park Amusement Company (SPAC)?
• Q4: Suppose the reserve requirement ratio is 0.1 and USB makes the largest loan it can to SPAC. SPAC
then spends all of this loan on materials from Jack’s Supply Company (JSC). JSC then deposits this
money into its checking account at USB Write down the balance sheet for USB after the loan and
deposit have taken place.
• Q5: Suppose there is no cash in the hands of the non-bank public.
What is the money supply after the
events in Q4 have taken place? HINT: Use the balance sheet in Q4.
3
Balance Sheet with Treasury Securities
The following balance sheet is for United States Bank (USB). USB is the only bank in theUSB
country.
takes deposits and makes loans.
It holds reserves as cash in the vault.
USB also owns US treasury securities.
Assets
Liabilities
Reserves:$120
Deposits:$600
Loans:$240
US treasury securities:
$240
• Q1: If the reserve requirement ratio is 0.2, can USB make a loan to Grimm’s Brewing (GB) without
selling any US treasury securities?
• Q2: If the reserve requirement ratio is 0.2 and the Federal Reserve purchases $240 of treasury securities
from USB, what is the largest loan amount that USB can make to GB?
• Q3: After the events in Q2 take place, GB then spends all of this loan on materials from Jack’s Supply
Company (JSC).JSC then deposits this money into its checking account at USB Write down the
balance sheet for USB after the loan and deposit have taken place.
• Q4: After the events in Q3 take place,
what is the largest loan amount that USB can make to the
Belli’s Burger Shop (BBS)?
• Q5: What is the name of the process by which the Federal Reserve purchases US treasury securities
from banks?
4

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