Alexander College

ECON 210 Money and Banking

Winter 2023

Instructor: Dr. Tony Xiang

Assignment #3
Due: Thursday, April 6

1. A bank has $200,000 of deposits and holds $60,000 in reserves. If its desired reserve
ratio is 20 percent, what is the maximum deposit outflow it can sustain without altering its
balance sheet?

2. A commercial bank has $800 of deposits as the only liabilities (excluding capital). Its
desired reserve ratio is 20% and it does not want to hold any excess reserves. The financial
regulatory authority requires it to have a minimum capital of 20% of assets. The
commercial bank holds 30% of its assets as government securities. Assets that are not held
as reserves or securities are lent out.
a) Assume the bank does not hold any capital in excess of the minimum required by the
regulator. Calculate the amount of assets. And write down the balance sheet of the
commercial bank.
b) Suppose there is a deposit withdrawal of $100. Assuming the bank cannot further change
any of its liabilities (including capital), and it still holds 30% of its assets as government
securities, write down the new balance sheet after the desired reserve ratio is satisfied
again.
c) Given the situation in b), how much of bad loan loss would cause bankruptcy?

3. Douglas Bank has a balance sheet as below:

Assets Liabilities and Equity
Reserves $5m Chequable deposits $25m
Securities $10m Term deposits $40m
Loans $60m Equity capital $10m

The manager estimates the average duration of assets to be 3 years, and average duration of
liabilities to be 2 years. Now market interest rate rises from 4% to 5%. What will be the
change of this bank’s net worth? Show your calculation.

4. Suppose Fraser Bank’s rate-sensitive assets are $10m securities, and its rate-sensitive
liabilities are $25m chequable deposits. What will happen to its profit if the interest rate
changes from 4% to 2%? Show your calculation.

5. Suppose the Bank of Canada buys $5 million worth of government securities from BMO,
a commercial bank.
a) Using T-account analysis, show what happens to the balance sheets of the BoC and
BMO immediately.
b) If BMO does not want to hold any excess reserves, it will make more loans. Show the
change for its balance sheet reflecting this lending.
c) Using T-account analysis, show what happens to the balance sheet of the BMO when the
borrower withdraws cash from BMO.
d) What is the net change for the balance sheet of BMO after the withdrawal? Show the T-
account.

6. (This question follows Q5.) Use the following notation: C is currency in circulation
outside banks, R is bank reserves, D is deposits, L is loans, MB is the monetary base, M is
total money supply, r is the required reserve ratio, and c is the currency-to-deposit ratio.
Assume c = 0.05 and r = 0.2. Suppose all commercial banks hold zero excess reserves.
Following the $5 million open market purchase, what will be the change of C, R, D, L, MB
and M after the money supply process is completed? Calculate:

m = ________________________

∆C = _______________________

∆R = _______________________

∆D = _______________________

∆L = _______________________

∆MB = _____________________

∆M = ______________________