Answer to Question #51463 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.
Briefly explain how the commercial banks respond to this new situation. Show the eventual effect on the balance sheet when the banking system has returned to equilibrium. What is the new level of the money supply?

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
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.
So, the money supply will be lower.