Introduction to Finance

3. 
Rework Problem 2 assuming Bank A has reserve requirements that 
are 15 percent of deposits. 
4. 
Assume that there are two banks, A and Z, in the banking system. 
Bank A receives a primary deposit of $600,000, and it must keep 
reserves of 12 percent against deposits. Bank A makes a loan in the 
amount that can be safely lent.
a. 
Show what Bank A’s balance sheet of assets and liabilities would 
look like immediately after the loan.
b. 
Assume that a check is drawn against the primary deposit made 
in Bank A and is deposited in Bank Z. Show what the balance sheet 
of assets and liabilities would look like for each of the two banks 
after the transaction has taken place.
c.
Now assume that Bank Z makes a loan in the amount that can be 
safely lent against the funds deposited in its bank from the transac-
tion described in (b). Show what Bank Z’s balance sheet of assets 
and liabilities would look like after the loan.
5. 
The SIMPLEX fi nancial system is characterized by a required 
reserves ratio of 11 percent; initial excess reserves are $1 million, and 
there are no currency or other leakages.
a. 
What would be the maximum amount of checkable deposits 
after deposit expansion, and what would be the money multiplier?
b. 
How would your answer in (a) change if the reserve requirement 
had been 9 percent?
6. 
Assume a fi nancial 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?
b. 
What will be the system’s money supply?
7. 
Rework Problem 6 assuming the reserve ratio is 14 percent?
8. 
The BASIC fi nancial system has a required reserves ratio of 15 per-
cent; initial excess reserves are $5 million, cash held by the public is