Suppose the total assets and liabilities of Bank A are the following: Deposits=$100 million, Reserve=$10 million, Securities=$100 million.
(a) (5 pts) In the balance sheet of Bank A, what item(s) is(are) on the right-hand side? What is(are) its(their) value(s)? What is Bank A’s reserve ratio?
(b) (4 pts) In the case of (a), what is the leverage ratio of Bank A? If the value of the securities drops by 5 million, in which direction and by what percentage does the bank capital change?
(c) (2 pts) Suppose the bank holds the reserve ratio as you calculated in part (a). Now someone deposits $1000 and Bank A loans out as much as possible. What is the immediate change in money supply?
(d) (3 pts) Suppose all the banks in this economy hold the same reserve ratio as you calculated in part (a). In addition, no banks hold any excess reserve. The households do not hold any currency. What is the money multiplier? Eventually, how much money supply will be created in the economy by this $1000 deposit?
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b is the correct answer ok
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