Scribd Logo
Upload

Welcome to Scribd!

  • FMPMC 123 Midterm Exam Part II

    Uploaded by

    Paul Mateo
    22 views4 pages
    This document describes a bank money creation example to illustrate how a $100 cash deposit in a bank can create more than $100 in new money. It shows the changes to three banks' balance sheets over three rounds as loans are made and spent, being deposited in other banks. In round one, the initial $100 deposit allows the first bank to make $80 in loans, creating $180 total. In round two, those loans are deposited in another bank, allowing $64 in new loans or $256 total money. Round three could see another $51.20 in loans or $307.20 total money created from the original $100 deposit. The money multiplier is approximately 3, meaning the money supply can increase by three times

    Original Description:

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    This document describes a bank money creation example to illustrate how a $100 cash deposit in a bank can create more than $100 in new money. It shows the changes to three banks' balance sheets over three rounds as loans are made and spent, being deposited in other banks. In round one, the initial $100 deposit allows the first bank to make $80 in loans, creating $180 total. In round two, those loans are deposited in another bank, allowing $64 in new loans or $256 total money. Round three could see another $51.20 in loans or $307.20 total money created from the original $100 deposit. The money multiplier is approximately 3, meaning the money supply can increase by three times

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    22 views4 pages

    FMPMC 123 Midterm Exam Part II

    Uploaded by

    Paul Mateo
    This document describes a bank money creation example to illustrate how a $100 cash deposit in a bank can create more than $100 in new money. It shows the changes to three banks' balance sheets over three rounds as loans are made and spent, being deposited in other banks. In round one, the initial $100 deposit allows the first bank to make $80 in loans, creating $180 total. In round two, those loans are deposited in another bank, allowing $64 in new loans or $256 total money. Round three could see another $51.20 in loans or $307.20 total money created from the original $100 deposit. The money multiplier is approximately 3, meaning the money supply can increase by three times

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    SAINT LOUIS UNIVERSITY

    School of Accountancy, Management, Computing and Information Studies


    Department of Business Economics and Financial Management

    FMPMC 123 BANKING AND FINANCIAL INSTITUTIONS

    MID-TERM EXAMINATION
    SECOND SEMESTER, AY 2021-2022

    II. PROBLEM: HOW BANKS CREATE MONEY

    Assume that a Php100 is deposited in the Alpha National Bank. Use the balance sheets of banks
    to see the effects (all figures are in billion pesos).

    Given: RRR (Required Reserve Ratio) = 20%


    ER = Excess Reserves
    Alpha National Bank = ANB
    Beta National Bank = BNB
    Delta National Bank = DNB

    Initially, all banks have no excess reserves.


    Loans made by banks are equal to their excess reserves
    A cash of Php100 is deposited in a checking account (DD) at ANB.

    You have to show the changes in each bank’s balance sheets as a result of this P10 cash deposit
    and the banks’ increased ability to make loans.

    1. Round One

    Step 1: Php100 (billion) is deposited in ANB

    Alpha National Bank


    Assets Liabilities and Net Worth

    Reserves Php 100B Demand Deposits Php 100B

    Required Php 20B

    Excess Php 0

    Step 2: ANB makes loans equal to its excess reserves

    Alpha National Bank


    Assets Liabilities and Net Worth

    Reserves __100__ Demand Deposits __100__

    Required 20 Demand Deposits 120

    Excess 80

    Loan 80

    Step 3: The loan is spent, now deposited at BNB, and the check clears.

    Alpha National Bank


    Assets Liabilities and Net Worth

    Reserves 100 Demand Deposits __100__

    Required 20 Demand Deposits 120

    Excess 80

    Loan __80___

    2. Round Two

    Step 1: The check from round one is deposited in BNB

    Beta National Bank


    Assets Liabilities and Net Worth

    Reserves 80 Demand Deposits 80

    Required 16

    Excess 0

    Step 2: Loan is made by BNB equal to its excess reserves

    Beta National Bank


    Assets Liabilities and Net Worth

    Reserves __80___ Demand Deposits __80___


    Required 16 Demand Deposits 96

    Excess 64

    Loan 64

    Step 3: The loan is spent, now deposited at DNB, and the check clears.

    Beta National Bank


    Assets Liabilities and Net Worth

    Reserves 80 Demand Deposits __80___

    Required 16 Demand Deposits 96

    Excess 64

    Loan __64___

    3. Round Three

    Step 1: The check from round two is deposited in DNB

    Delta National Bank


    Assets Liabilities and Net Worth

    Reserves 64 Demand Deposits 64

    Required 12.8

    Excess 0

    Answer the following questions:


    1. How much money was created in round one?

    2. How much money was created in round two?

    3. How much money can be created in round three?


    4. What is the money multiplier? Interpret the result.

    5. What is the maximum total increase in the money supply that can occur as a result of the
    initial P100 cash deposit?

    You might also like