Assume Banc One Receives A Primary Deposit Of 1 Million
Assume That Banc One Receives A Primary Deposit Of 1 Mil
Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.
A financial system has a monetary base of $25 million. The required reserves ratio is 10 percent, and there are no leakages in the system.
a. What is the size of the money multiplier?
b. What will be the system’s money supply?
Last year, the Australian dollar was trading at $.5527, the Mexican peso at $.1102, and the British pound at $1.4233. This year, the Australian dollar is worth $0.7056, the Mexican peso is $.0867, and the British pound is $1.8203. Calculate the percentage appreciation or depreciation of each of these three currencies between last year and this year.
Paper For Above instruction
The financial operations of banking institutions and the dynamics of currency exchange rates are fundamental topics in understanding economic systems. This paper addresses three core aspects: the immediate impact of a deposit on a bank’s balance sheet, the calculation of money multiplier effects within a monetary system, and the analysis of currency appreciation and depreciation over time. Each section illustrates key principles of monetary policy, banking reserves, and foreign exchange dynamics through practical examples and detailed calculations.
Banc One’s Balance Sheet After a $1 Million Deposit
When Banc One receives an initial deposit of $1 million, it must allocate reserves according to regulatory requirements. With a reserve ratio of 20 percent, the bank is mandated to hold 20 percent of the deposit as reserves, and the remaining 80 percent can be used as loans or investments. The simple balance sheet immediately following the deposit reflects these allocations.
Assets include reserves and loans, while liabilities are represented by customer deposits. The reserve requirement calculation is straightforward: 20% of $1 million equals $200,000. Consequently, Banc One’s balance sheet immediately after the deposit is:
- Assets:
- Reserves: $200,000
- Loans: $800,000
- Liabilities:
- Customer Deposits: $1,000,000
This snapshot underscores the fundamental banking principle that a portion of deposits must be held as reserves, with the remainder available for lending activities. It also highlights the residual asset and liability sides balancing at the same value, illustrating the core accounting equation for banks.
Money Multiplier and Money Supply Analysis
The money multiplier is a crucial concept that describes how initial reserves lead to an expanded money supply within the banking system. It is inversely related to the reserve requirement ratio. Mathematically, the money multiplier (m) is given by:
\[ m = \frac{1}{\text{Reserve Ratio}} \]
Given a reserve ratio of 10 percent (0.10), the multiplier becomes:
\[ m = \frac{1}{0.10} = 10 \]
This means that each dollar of reserves can support up to ten dollars in the total money supply through the process of fractional reserve banking, where banks lend out the excess reserves.
The system’s total money supply (M) is derived from the monetary base (B) multiplied by the multiplier:
\[ M = B \times m \]
Given a monetary base of $25 million:
\[ M = 25\, \text{million} \times 10 = 250\, \text{million} \]
Thus, the total money supply in the system is estimated at $250 million, illustrating the amplification effect of banking reserves in creating broad monetary aggregates.
Currency Exchange Rate Movements: Appreciation and Depreciation
Foreign exchange markets fluctuate based on various economic factors, including interest rates, inflation expectations, and geopolitical stability. Analyzing the percentage appreciation or depreciation of currencies is essential for investors, policymakers, and traders.
The percentage change is calculated as:
\[ \text{Percent Change} = \left( \frac{\text{New Rate} - \text{Old Rate}}{\text{Old Rate}} \right) \times 100 \]
Australian dollar:
- Last year: $0.5527
- This year: $0.7056
\[
\text{Percentage Change} = \left( \frac{0.7056 - 0.5527}{0.5527} \right) \times 100 \approx 27.82\%
\]
Since the rate increased, the Australian dollar appreciated by approximately 27.82% against the U.S. dollar.
Mexican peso:
- Last year: $0.1102
- This year: $0.0867
\[
\text{Percentage Change} = \left( \frac{0.0867 - 0.1102}{0.1102} \right) \times 100 \approx -21.28\%
\]
A negative percentage indicates depreciation; the Mexican peso depreciated by approximately 21.28%.
British pound:
- Last year: $1.4233
- This year: $1.8203
\[
\text{Percentage Change} = \left( \frac{1.8203 - 1.4233}{1.4233} \right) \times 100 \approx 27.95\%
\]
The British pound appreciated by approximately 27.95% against the dollar.
These calculations reveal significant currency movements, reflecting changes in economic conditions, monetary policy shifts, and global market sentiment influencing exchange rates.
Conclusion
The interconnectedness of banking operations, monetary policy, and foreign exchange markets underscores the importance of understanding these principles for effective economic analysis. From the immediate impact of deposits on bank balance sheets to the broader implications of the money multiplier, and the nuances of currency valuation shifts, each component plays a vital role in shaping economic stability and growth. Policymakers and financial institutions must continually adapt to these dynamic parameters to maintain financial stability and foster economic development.
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