A bank has issued 4 billion in transactions deposits and 2 billion in time deposits and other
nontransactions deposits. Its other liabilities and net worth equal 1 billion. The bank has 100 million in total reserves. The only reserve requirement that this and all other banks must satisfy is a 2 percent ratio that applies to transactions deposits.
A. What is the amount of the banks total assets?
B. What is the amount of the banks excess reserves?
C. What is the potential money multiplier for the banking system?
A. To find the amount of the bank's total assets, we need to add up all the liabilities and the net worth.
Total assets = Transactions deposits + Time deposits and other nontransactions deposits + Other liabilities and net worth
Total assets = 4 billion + 2 billion + 1 billion
Total assets = 7 billion
Therefore, the amount of the bank's total assets is 7 billion.
B. To calculate the amount of the bank's excess reserves, we need to subtract the required reserves from the total reserves.
Excess reserves = Total reserves - Required reserves
Given that the reserve requirement is 2 percent on transactions deposits and the bank has 4 billion in transactions deposits:
Required reserves = 0.02 * 4 billion
Required reserves = 80 million
Excess reserves = 100 million - 80 million
Excess reserves = 20 million
Therefore, the amount of the bank's excess reserves is 20 million.
C. The potential money multiplier for the banking system can be calculated using the formula:
Potential money multiplier = 1 / Reserve requirement ratio
The reserve requirement ratio for transactions deposits is 2 percent, which translates to 0.02.
Potential money multiplier = 1 / 0.02
Potential money multiplier = 50
Therefore, the potential money multiplier for the banking system is 50.
To find the answers to these questions, we'll need to understand the concepts of total assets, excess reserves, and the money multiplier.
A. Total assets refer to all the resources owned by the bank, including deposits, loans, and other investments. In this scenario, the bank has issued 4 billion in transactions deposits, 2 billion in time deposits and other nontransactions deposits. Additionally, it has 100 million in total reserves.
To calculate the total assets, we sum the deposits and the reserves:
Total assets = Transactions deposits + Time deposits + Other nontransactions deposits + Total reserves
Total assets = 4 billion + 2 billion + 100 million
Total assets = 6.1 billion
Therefore, the amount of the bank's total assets is 6.1 billion.
B. Excess reserves represent the amount of reserves that a bank holds above the required reserve ratio. In this case, the reserve requirement is 2 percent of transactions deposits. To calculate the excess reserves, we need to determine the required reserves first.
Required reserves = Reserve ratio * Transactions deposits
Required reserves = 0.02 * 4 billion
Required reserves = 80 million
Excess reserves = Total reserves - Required reserves
Excess reserves = 100 million - 80 million
Excess reserves = 20 million
Therefore, the amount of the bank's excess reserves is 20 million.
C. The potential money multiplier for the banking system is a measure of how much the money supply can increase with each dollar increase in reserves. In this case, we can calculate it by using the reserve requirement ratio.
Money multiplier = 1 / Reserve requirement ratio
Money multiplier = 1 / 0.02
Money multiplier = 50
Therefore, the potential money multiplier for the banking system is 50. It means that for each dollar increase in reserves, the money supply can increase by 50 dollars.