Answer to Question #51263 in Macroeconomics for bob

Question

Suppose the consolidated balance sheet of an economy’s banking system is shown in the following table:
Assets: Liabilities:
Currency 10 Deposits 2000
Deposits at the central bank 90
Government Bonds 300
Loans Outstanding 1800 Capital 200
Total 2200 Total 2200
In answering the following questions, assume that the banking system is initially in equilibrium and that
the public holds all of its money in the form of deposits in the banking system.
(a) What is the value of reserves in the banking system? What is the desired (target) reserve ratio of the commercial banks? What is the value of the money supply?

Answer 1

Assets: Liabilities:
Currency 10 Deposits 2000
Deposits at the
central bank 90
Government Bonds 300
Loans Outstanding 1800 Capital 200
Total 2200 Total 2200
(a) What is the value of reserves in the banking system is the value of deposits at the central bank - 90. So, the desired (target) reserve ratio of the commercial banks is rr = deposits at the central bank/loans = 90/1800*100% = 5%
The value of the money supply is 2200.