Question

Table A below shows abbreviated balance sheets for the central bank in the country of Beckland and B shows tables for its whole commercial banking system. The target reserve ratio for the banks is 10 percent. (All figures are in billions of dollars.)

a. Suppose that the Bank of Beckland buys $2 billion of government securities (T-bills) from the commercial banks. Show the immediate effects of this transaction on the balance sheets in column (1) of Tables A and B.

A) Central Bank of Beckland
Assets		(1)	Liabilities		(1)
Treasury bills	$196	$	Notes in circulation	$190	$
Short-term loans to banks	8		Government deposits	7
			Deposits of banks	7

B) Beckland’s Banking System
Assets		(1)	(2)	Liabilities		(1)	(2)
Reserves:				Deposits	150
in vaults	8
in Bank of Beckland	7
Securities	33			Short-term loans from Bank of Beckland	8
Loans to customers	115			Equity	5

b. What effect does this transaction have on the money supply of Beckland?

    Money supply  (Click to select)  increases  decreases  does not change  .

c. What effect does the transaction have on the banking system’s excess reserves?

    Banks become   (Click to select)  under reserved  over reserved  by $  billion.

d. If the banks were to fully loan-up, show the result in column (2) of the banking system’s balance sheet.

To answer this question, complete the column (2) in the above table. Round your answers to the nearest whole number.

e. By how much has money supply now changed? Round your answers to the nearest whole number.

Change in money supply +/- of $  billion.

Answer 1

Answers:

a.) Table 9.1 (completed)

A. Central Bank of Beckland

Asset		(1)	Liabilities		(1)
Treasury bills	$196	$198	Notes in circulation	$190	$190
Short-term loans to bank	8	8	Government deposits	7	7
			Deposits of banks	7	9

B. Beckland's Banking System

Assets		(1)	(2)	Liabilities		(1)	(2)
Reserves:				Deposits	150	150	170
In vaults	8	8	8	Short-term loans from banks of Beckland	8	8	8
In bank of Beckland	7	9	9	Equity	5	5	5
Securities	33	35	35
Loans to customers	115	115	135

b. no effect in the money supply

c. excess reserves of $2B

d. see Table 9.1B (completed) column (2)

e. +$20B