Homework 3

Economics 470/570
Winter 2005
Review Question Set for Week #3

Definitions

Asset

Liability

Demand Deposit

Bank Reserves

Reserve Requirement

Required Reserves

Excess Reserves

Short Answer

1. Write down the government budget constraint and explain each term.

2. Why is a demand deposit an asset for an individual, but a liability of the bank?

Essay

1. Show the t-accounts and the balance sheet for the following series of transactions. 

(i) Open a bank with 10 million dollars, put 3 million into buildings and equipment.

(ii) Put 2 million of the cash into T-bills.

(iii) Deposit 1.5 million into regional Fed bank.

(iv) Collect 4 million in deposits from other banks.

(v) Let the required reserve ratio be 20% and show what happens if the bank loans out all excess reserves.