Week 2 Assignment 1: Homework 1
FIN 100: Principles Of Finance
Chapter 4 Exercise 2
As the executive of a bank or thrift institution you are faced with an intense seasonal demand for loans. Assuming that your loanable funds are inadequate to take care of the demand, how might your Reserve Bank help you with this problem?
An important function of the Federal Reserve Bank is to provide loans to depositories at times when additional funds are needed. A loan may be based on the promissory note of the borrowing depository, or, alternatively, the depository may discount certain assets in its portfolio with the Federal Reserve Bank of its district. This is most to be done by electronically transferring more funds into the company’s account, this can be done by using Fedwire.
Chapter 5 Problem 1
Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.
Liabilities of the bank increase by $1,000,000Debit Assets: reserves $200,000
Debit Assests: cash available $800,000
Chapter 5 Problem 6
Assume a financial system has a monetary base of $25 million. The required reserves ratio is 10 percent, and there are no leakages in the system.
a.What is the size of the money multiplier?
Money multiplier: 1/.10 = 10.0
b.What will be the system’s money supply?
Money supply: $25 million × 10.0 = $250 million