Suppose that Country A has only two commercial banks and one central bank. Bank A has...

 

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Suppose that Country A has only two commercial banks and one central bank. Bank A has $10 million in base money and Bank B has $15 million in base money. Bank A has two customers, Sophie and Steven, who have $2 million each in their bank accounts. Bank B has only one customer, Ari, who has $4 million in her bank account. a) Sophie finds a briefcase washed up on the beach that contains $10 million in cash. She deposits the money into her account with Bank A. i. Show the impact on the balance sheet for Bank A (make sure to include the amount of equity on the balance sheet). ii. Explain the impact on the amount of money in the system when Sophie deposits the $10 million into her bank account. b) Sophie now wishes to build a house and employs Ari to do the planning which will cost $20 million. Bank A gives Sophie a loan for $10 million. Sophie then transfers $20 million from her bank account to Ari. i. Show the impact on the balance sheet for Bank A both before and after the $20 million transfer takes place (make sure equity is included on the balance sheet). ii. Does Bank A and Sophie have a problem after it makes the transfer of funds to Ari's bank account? Explain. iii. Show the impact on the balance sheet for Bank B after the $20 million transfer takes place (make sure equity is included on the balance sheet). c) Country A's Central Bank asks Bank A if it needs a short term of $5 million. Does it? Explain. If so, show the impact of the loan on Bank A's balance sheet. i) Does Bank A need the short term loan? Explain. ii) How much broad money is in the system if Bank A takes the short term loan of $5 million. Suppose that Country A has only two commercial banks and one central bank. Bank A has $10 million in base money and Bank B has $15 million in base money. Bank A has two customers, Sophie and Steven, who have $2 million each in their bank accounts. Bank B has only one customer, Ari, who has $4 million in her bank account. a) Sophie finds a briefcase washed up on the beach that contains $10 million in cash. She deposits the money into her account with Bank A. i. Show the impact on the balance sheet for Bank A (make sure to include the amount of equity on the balance sheet). ii. Explain the impact on the amount of money in the system when Sophie deposits the $10 million into her bank account. b) Sophie now wishes to build a house and employs Ari to do the planning which will cost $20 million. Bank A gives Sophie a loan for $10 million. Sophie then transfers $20 million from her bank account to Ari. i. Show the impact on the balance sheet for Bank A both before and after the $20 million transfer takes place (make sure equity is included on the balance sheet). ii. Does Bank A and Sophie have a problem after it makes the transfer of funds to Ari's bank account? Explain. iii. Show the impact on the balance sheet for Bank B after the $20 million transfer takes place (make sure equity is included on the balance sheet). c) Country A's Central Bank asks Bank A if it needs a short term of $5 million. Does it? Explain. If so, show the impact of the loan on Bank A's balance sheet. i) Does Bank A need the short term loan? Explain. ii) How much broad money is in the system if Bank A takes the short term loan of $5 million.

Answer rating: 100% (QA)

a i Impact on the balance sheet for Bank A Assets Reserves 20M Loans 10M ii When Sophie deposits 10 ... View the full answer