Suppose over the course of a day, Bank A receives a $1,300 check on Bank B and Bank B receives a $1,200 check on Bank A. If Bank A and Bank B use real-time gross settlement,

a. How much money must the banks transport to settle the two checks?

b. What is the minimum amount of reserves each bank will need at the start of the day in order to ensure it can make the required settlement? (Assume either check could be the first one deposited.)

c. If the interest rate on short-term government bonds is 2% and reserves pay 0%, what is the annual interest cost for each bank of holding the amount of reserves specified in part (b)? If Bank A and Bank B use periodic net settlement,

d. How much money must the banks transport to settle the two checks?

e. What is the minimum amount of reserves each bank will need at the start of the day in order to ensure it can make the required settlement? (Assume either check could be the first one deposited.)

f. If the interest rate on short-term government bonds is 2% and reserves pay 0%, what is the annual interest cost for each bank of holding the amount of reserves specified in part (e)?

Answer rating: 100% (QA)

a If Bank A receives a 1300 check on Bank B and Bank B receives a 1200 check on Bank A the total amo... View the full answer