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Chapter 15: Q1. (page 319)

Suppose the assets of the Silver Lode Bank are \(100,000 higher than on the previous day and its net worth is up to \)20,000. By how much and in what direction must its liabilities have changed from the day before?

Short Answer

Expert verified

Due to the increase in assets and net worth, the liabilities have increased to $80,000.

Step by step solution

01

Money multiplier and the required ratio

The balance sheet, to represent the true financial position, must satisfy the following equation:

Assets = Liabilities + Net worth

Therefore, a change in assets must be equal to a change in liabilities + a change in net worth.鈻�A=鈻�L+鈻�NW鈻�L=鈻�A-20000鈻�L=100000-20000鈻�L=80000

The change in liabilities is equal to $80,000. The equation needs to be balanced; thus, liabilities will increase if assets and net worth have increased. Therefore, liabilities have increased to $80,000 due to change in assets and liabilities.

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Most popular questions from this chapter

The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent.

Assets
Liabilities and Net worth

\((1)(2)
\)(1')(2')
Reserves

Securities

Loans		22,000

38,000

40,000

Checkable deposits
1,00,000


a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1鈥� how the bank鈥檚 balance sheet will appear after the bank has loaned this additional amount.

b. By how much has the money supply changed?

c. How will the bank鈥檚 balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2鈥�.

d. Answer questions a, b, and c again, on the assumption that the reserve ratio is 15 percent.

What is the difference between an asset and a liability on a bank鈥檚 balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank鈥檚 balance sheet?

A commercial bank has \(100 million in checkable-deposit liabilities and \)12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank鈥檚 excess reserves?

  1. \(100 million

  2. \)88 million

  3. \(12 million

  4. \)2 million

If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

Explain why a single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?
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