Assume That All Banks Shown in the Table Below Observe

question 127

Essay

Assume that all banks shown in the table below observe the same required reserve ratio. Also assume that the banks are listed in sequential order (thus the loans from The First National Bank become the deposits for the Second National Bank, and the loans from the Second National Bank become the deposits for the Third National Bank, and so on). Also, the banks' balance sheets must always be balanced.
Table: National Banks First National Bank
$\begin{array}{ll}\hline \text { ASSETS } & \text { LIABILITIES } \\\hline \text { Required reserves }\quad\$ 26,000& \text { Deposits }\quad \$ 520,000 \\\text { Loans } & \\\text { TOTAL } & \text { TOTAL }\end{array}$

$\begin{array}{ll}\text { Second National Bank } & \\\hline \text { ASSETS } & \text { LIABILITIES } \\\hline \text { Required reserves } & \text { Deposits } \\\text { Loans } & \\\text { TOTAL } & \text { TOTAL } \\\hline\end{array}$

$\text { Third National Bank }$
$\begin{array}{ll}\hline \text { ASSETS } & \text { LIABILITIES } \\\hline \text { Required reserves } & \text { Deposits } \\\text { Loans } & \\\text { TOTAL } & \text { TOTAL }\end{array}$
Use the information in the table to answer the following questions:
A) Fill in the balance sheets for all banks in the table.
B) What is the initial money multiplier in this country?
C) Now suppose that banks fear an increased demand for withdrawals so each bank maintains 3% extra deposits as excess reserves over and above required reserves. What is the effective money multiplier now?
D) What difficulty associated with monetary policy is illustrated by this question?

• A) Fill in the balance sheets for all banks in the table.
• B) What is the initial money multiplier in this country?
• C) Now suppose that banks fear an increased demand for withdrawals so each bank maintains 3% extra deposits as excess reserves over and above required reserves. What is the effective money multiplier now?
• D) What difficulty associated with monetary policy is illustrated by this question?

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Definitions:

Appreciation

An increase in the value of an asset or currency over time.

Dollar

A widely used currency in international trade, often associated with the United States Dollar (USD), recognised by the symbol $.

Managed Float System

An exchange rate system in which a country's currency value is allowed to fluctuate in response to foreign exchange market mechanisms, with occasional intervention by the country's monetary authorities to stabilize the currency's value.

Exchange Rates

The value of one currency expressed in terms of another, determined by the foreign exchange market.