# Assets

December 9, 2015

Consider the following balance sheet of Princeton bank

Balance Sheet for Princeton Bank

(amounts in millions of dollars)

Assets LIabilities

Reserves 30 Transactions 300

Securities 140 deposits

Loans 280 Non transaction 140

Total assets 450 deposits

Capital 10

Total Liabilities 450

+capital

Of Princeton Bank%u2019s reserves, \$6 million are required clearing, balances held at the Federal Reserve Bank of Philadelphia. Statistics for the economy as a whole are

D=\$2,000 billion

R= \$200 billion

C/D=0.2= ratio of currency to transaction deposits.

N/D= 2.0= ratio of non transaction deposits to deposits.

MMF/D = 1.6 = ratio of retail money market mutual funds to transaction deposits.

q = 0.8 = 8 percent= required reserve ratio on transaction deposits =RR/D= ratio of required reserves to transaction deposits.

RCB/d = 0.02 = 2 percent = ration of required clearing balances to transactions deposits

a.) Calculate the monetary base MB, M1, and M2. Are there any excess reserves in Princeton Bank? Are there any excess reserves in the economy as a whole?

b.) Calculate the multipliers for M1 and M2.

c.) Calculate the values of N, D, C, R, MMF, and RCB using the fact that C/D = 0.2 and C + D = M1

d.) Suppose that the Fed raises the reserve requirement on transaction deposits to 0.18= 18 percent. What happens to Princeton Bank%u2019s balance sheet? Does it have excess reserves , or is it short in reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R?

e.) Suppose that instead of raising the reserve requirements in part c, the Fed sells \$150 billion of securities in the open market, including \$30 million to a customer of Princeton Bank. What happens to Princeton Bank%u2019s balance sheet? Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1, M2, N, D, C, MMF, RCB, and R?

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