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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.△A=△L+△NW△L=△A-20000△L=100000-20000△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

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have \(2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

  1. \)0

  2. \(200 million

  3. \)2 billion

  4. $20 billion

Suppose that last year \(30 billion in new loans were extended by banks while \)50 billion in old loans were paid off by borrowers. What happened to the money supply?

  1. Increased.

  2. Decreased.

  3. Stayed the same.

“Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced”. Do you agree? Explain why or why not.

Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?

Suppose the following simplified consolidated balance sheet is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent.

a. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? Show in columns 1 and 1′ how the consolidated balance sheet would look after this amount has been loaned. What is the value of the monetary multiplier?

b. Answer the questions in part a assuming the reserve ratio is 20 percent. What is the resulting difference in the amount that the commercial banking system can loan?
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