Fin 100 Introduction To Finance Please Answer And Show The S

Fin 100 Introduction To Finance Please Asnwer And Show the Solution

Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposit. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.

Assume 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?

Assume that last year the Australian dollar was trading at $.5527, the Mexican peso at $.1102, and the United Kingdom (British) pound was worth $1.4233. By this year the U.S dollar value of an Australian dollar was $.7056, the Mexican peso was $.0867, and the British pound was $1.8203. Calculate the percentage appreciation or depreciation of each of these three currencies between last year and this year.

Paper For Above instruction

Introduction

Understanding the fundamentals of banking operations, monetary systems, and currency valuation is essential in the field of finance. This paper addresses specific problems relating to bank reserves and balance sheets, the determination of the money supply through the money multiplier, and the analysis of currency appreciation and depreciation over time. Each problem is discussed in detail, illustrating core financial concepts and calculations necessary for understanding macroeconomic and international financial dynamics.

Problem 1: Bank Balance Sheet After Deposit

When Banc One receives a deposit of $1 million with a reserve requirement of 20%, the bank must hold 20% of this deposit as reserves. This reserve requirement ensures the bank can meet withdrawal demands without risking insolvency. The calculation for required reserves is straightforward:

• Required reserves = $1,000,000 × 20% = $200,000

Consequently, the remaining amount, $800,000, can be allocated towards loans or other assets, assuming the bank chooses to lend out the excess reserves, making the assets and liabilities as follows:

The bank’s total assets equal its liabilities, maintaining the balance sheet integrity. This simplified model demonstrates the immediate impact of deposit inflow on the bank’s reserves and loan capacity.

Problem 2: Money Multiplier and Money Supply

(a) Calculating the Money Multiplier

The money multiplier is a measure of the expansion of the monetary base through the banking system. It is calculated as the reciprocal of the reserve ratio:

Money Multiplier = 1 / Reserve Ratio = 1 / 0.10 = 10

This indicates that each dollar of reserves can support $10 of money supply through the banking system's lending activities.

(b) Calculating the Money Supply

Given a monetary base of $25 million, and assuming no leakages in the system, the total money supply can be determined by multiplying the monetary base by the money multiplier:

Money Supply = Monetary Base × Money Multiplier = $25,000,000 × 10 = $250,000,000

This implies that the total money circulating within the economy, including currency and deposits, would be approximately $250 million, demonstrating the significant impact of reserve ratios on macroeconomic liquidity.

Problem 3: Currency Appreciation and Depreciation

Examining currency changes over time requires comparing the exchange rates from last year to this year and calculating the percentage change.

Australian Dollar (AUD)

1. Last year: $.5527 per AUD
2. This year: $.7056 per AUD

The increase signifies an appreciation, calculated as:

Percentage Change = [(New Rate - Old Rate) / Old Rate] × 100

= [($.7056 - $.5527) / $.5527] × 100 ≈ (0.1529 / 0.5527) × 100 ≈ 27.67%

The Australian dollar has appreciated by approximately 27.67% against the US dollar.

Mexican Peso (MXN)

1. Last year: $.1102 per MXN
2. This year: $.0867 per MXN

Percentage Change:

= [(0.0867 - 0.1102) / 0.1102] × 100 ≈ (-0.0235 / 0.1102) × 100 ≈ -21.33%

The Mexican peso depreciated by approximately 21.33% against the US dollar.

British Pound (GBP)

1. Last year: $1.4233 per GBP
2. This year: $1.8203 per GBP

Percentage Change:

= [(1.8203 - 1.4233) / 1.4233] × 100 ≈ (0.397 / 1.4233) × 100 ≈ 27.91%

The British pound appreciated approximately 27.91% relative to the US dollar.

Conclusion

The analysis demonstrates how currency values fluctuate over time due to various economic factors. The significant appreciation of the Australian dollar and British pound suggests strong foreign investment or economic growth, whereas the depreciation of the Mexican peso indicates potential economic challenges or inflationary pressures. Understanding these currency movements is vital for international trade, investment strategies, and macroeconomic policies, influencing global economic stability and competitiveness.

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