1)What happen to the net public debt if the federal government operates next year with a:
1) Budget deficit?
2) balanced budget?
3) budget surplus?
2) A bank has $120 million in total assets, which are composed of legal reserves, loans, and securities. Its only liabilities are $120 million in transactions deposits. The bank exactly satisfies its reserve requirement, and its total legal reserves equal $6 million. What is the required reserve ratio?
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To answer the first question, we need to understand the concepts of net public debt, budget deficit, balanced budget, and budget surplus.
1) Budget Deficit: A budget deficit occurs when the federal government's expenses (government spending) exceed its revenues (taxes and other sources of income). To cover this deficit, the government needs to borrow money by issuing Treasury bonds. These bonds increase the net public debt because they represent the amount owed by the government to its creditors, both domestically and internationally.
2) Balanced Budget: A balanced budget occurs when the federal government's expenses equal its revenues. In this case, the government does not need to borrow money, so the net public debt remains the same as before.
3) Budget Surplus: A budget surplus occurs when the federal government's revenues exceed its expenses. In this case, the government can use the surplus to repay some of its outstanding debt. As a result, the net public debt decreases.
Now, let's answer the second question regarding the required reserve ratio:
The required reserve ratio is the percentage of a bank's total deposits that it must hold as legal reserves. It is set by the central bank or regulatory authority and serves as a tool to regulate the banking system and ensure stability.
In this case, we know that the bank has $120 million in total assets, which are composed of legal reserves, loans, and securities. Its liabilities are $120 million in transactions deposits, and its total legal reserves equal $6 million.
To calculate the required reserve ratio, we can use the formula:
Required Reserve Ratio = Legal Reserves / Total Deposits
In this case, the bank's legal reserves are $6 million, and its total deposits (liabilities) are also $120 million.
Required Reserve Ratio = $6 million / $120 million = 0.05 or 5%
Therefore, the required reserve ratio for this bank is 5%.