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3) Suppose banks are required to hold reserves equ...

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3) Suppose banks are required to hold reserves equal to 5 percent of deposits and that a bank?s balance sheet looks as follows (in $ millions): Assets Liabilities Reserves $100 Deposits $4,000 Loans $2,000 Treasury Bills $1,900 a) If the bank were to come into compliance with the required reserve ratio requirement by selling some of its Treasury Bills to the Federal Reserve and asking that the proceeds be deposited into its Reserve Account at the Fed, how much in T-Bills would it need to sell to the Fed? b) Assuming it was in compliance, how much more could the bank lend instead of investing in T-Bills? c) Why would the bank want to do this?

 

Paper#2712 | Written in 18-Jul-2015

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