Answer to Question #51267 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.
(d) How would your answer to part (c) change if this banking system was subject a “minimum capital
requirement” (in particular, a regulation that requires that the banking system maintain a
Capital/Loan ratio of at least 10%)?

Answer 1

Assets:
Currency 10
Deposits at the
central bank 90
Government Bonds 300
Loans Outstanding 1800
Total 2200
Liabilities:
Deposits 2000
Capital 200
Total: 2200
(d) If this banking system was subject a “minimum capital requirement”, then there will be less loans outstanding and the secondary money supply, so the multiplier effect will be lower.