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Part II:

Answer the following 4 parts according tho the following information (40 points).
Assume that Securitas Bank is a medium-sized bank in the country of Hyponatremia. The banks only
assets and liabilities at the beginning of the year are given in the following balance sheet:
Assets
Vault cash

Liabilities
Checking Deposits

$8 Billion
Deposits in the Central Bank

$200 Billion
Loans from the Central Bank

?
Loans

$10 Billion
Taxes

$230 Billion

$20 Billion

Bonds
$50 Billion
Real Estate

Bank Capital
$30 Billion

5(a)
Assume the required reserve ratio is 6%, and the percentage of excess reserves that Securitas Bank
wants to hold is 2%.
Using this information, calculate the amount of deposits with the Central Bank, and the banks capital.
Show your work.
5(b).
Assume that over the course of the year, the bank receives $25 Billion in new deposits, makes $10 Billion
in new loans to businesses and consumers, and $25 Billion in loans default.If there are no changes in any
of the other balance sheet categories, show Securitas Banks balance sheet at years end. Be sure to
include any changes in reserves, assuming that any new reserves are held as deposits with the Central
Bank, so vault cash stays constant at $8 Billion. Note that the excess reserve ratio you found in part (a) no
longer applies, although the required reserve ratio is still 6%
Show the final balance sheet, not changes in the balance sheet.
Explain your reasoning, and show your work.
5(c).
Did the bank make or lose money over the year? Explain.
5(d).
Given that the required reserve ratio stayed at 6%, what is the new excess reserve ratio? Show your work.

Part III:
Answer the following 2 parts according tho the following information (30 points).
Consider two countries: North and South. In South banks are required to hold 100% of their deposits as
reserves. In North, the required reserve ratio is 50%. Banks do not hold excess reserves in North or in
South.
No cash is held by the public in South, while in North citizens hold $500,000 in cash. Each country has $1
million in reserves. Residents buy goods and services and do their banking only in their own country.
Neither country has any travelers checks.
6(a).
What is the money supply (M1) in each country? What is the money multiplier in each country? Explain,
and show your work.
6(b).
Suppose that the North Central Bank decides to reduce the reserve requirement from 50% to 10%. At the
same time, banks decide to hold excess reserves equal to 10% of deposits. Cash held by the public
remains at $500,000.
Meanwhile, in South, there is no change in Central Bank policy, and banks still hold no excess reserves.
However, citizens of South decide to withdraw a total of $200,000 from their accounts and hold it as cash.
By how much will the money supply (M1) change in each country. Explain and show your work.

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