Short free-response question
A bank's balance sheet
- Unit 4
- 5 points
- About 12 minutes
You can use a calculator on this question, just like on exam day.
A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.
The question and its sources
The table shows the balance sheet of First Bank of Halden. The required reserve ratio in Halden is 10 percent. Assume all banks in Halden lend out all of their excess reserves and no one holds extra cash.
Table 1. Balance sheet of First Bank of Halden
| Assets | Amount | Liabilities and owners' equity | Amount |
|---|---|---|---|
| Reserves | $50,000 | Demand deposits | $250,000 |
| Loans | $210,000 | Owners' equity | $50,000 |
| Government bonds | $40,000 | — | — |
Source: Hypothetical data
Suggested time: 12 minutes
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Part (a)
1 pointCalculate the dollar amount of required reserves for First Bank of Halden. Show your work.
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Part (b)
1 pointCalculate the bank's excess reserves. Show your work.
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Part (c)
1 pointCalculate the maximum change in the money supply that can result from the banking system lending out First Bank of Halden's excess reserves. Show your work.
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Part (d)
1 pointA customer withdraws $5,000 in cash from her checking account at First Bank of Halden and keeps the cash at home. What is the immediate effect of this withdrawal on M1? Explain.
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Part (e)
1 pointExplain one reason the actual increase in the money supply could be smaller than the amount you calculated in part (c) if the assumptions in the introduction did not hold.
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