Homework 71. Your uncle repays a $100 loan from Goliath National Bank by writing a $100 check from his GNBchecking...

Homework 7 

1. Your uncle repays a $100 loan from Goliath National Bank by writing a $100 check from his GNB 

checking account. Use T-accounts to show the effect of this transaction on your uncle and on 

GNB. Has your uncle’s wealth changed? Explain? 

2. GNB holds 250 million in deposits and maintains a reserve ratio of 10% 

a. Show a T-account for GNB 

b. Now suppose that GNB’s largest depositor withdraws $10 million in cash from her 

account. If GNB decides to restore its reserve ratio by reducing the amount of loans 

outstanding, show its new T-account 

c. Explain what effect GNB’s action will have on other banks 

d. Why might it be difficult for GNB to take the action described in part b? discuss another 

way for GNB to return to its original reserve ratio 

3. You take $100 you had kept under your mattress and deposit it in your bank account. If this 

$100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of 

deposits, by how much does the total amount of deposits in the banking system increase? By 

how much does the money supply increase? 

4. Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 

percent of deposits in reserve. It uses the rest of its assets to make bank loans 

a. Show the balance sheet of Happy Bank. 

b. What is Happy Bank’s leverage ratio? 

c. Suppose that 10 percent of the borrowers from Happy Bank default and these bank 

loans become worthless. Show the bank’s new balance sheet 

d. By what percentage do the bank’s total assets decline? By what percentage does the 

bank’s capital decline? Which change is larger? Why? 

5. The federal reserve conducts a 10 million dollar open market purchase of government bonds. If 

the required reserve ratio is 10 percent, what is the largest possible increase in the money 

supply that could result? Explain. What is the smallest possible increase? Explain. 

6. Assume that the reserve requirement is 5 percent. All other things equal, will the money supply 

expand more if the federal reserve buys 2,000 dollars worth of bonds or if someone deposits in 

a bank 2,000 dollars that he had been hiding in his cookie jar? If one creates more, how much 

more does it create.