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HW3 is due on Tuesday, April 27th. Please submit through SpeedGrader on Canvas. ECON 2302 Spring 2021 Homework 3: Money creation (25 points) 1. Let’s assume 10 Hilltopper business school alumni get together to create Hilltop Bank. They each contribute \$200,000 cash in the initial investment phase, and each is issued shares of stock in the bank. Right away, the bank purchases a furnished S. Congress building for \$1,100,000 and deposits the remainder of its cash as reserves at the Fed. On Balance Sheet 1, show what the complete balance sheet of the bank looks like after the purchase of the property. 2. President Martin is the bank’s first customer, and he deposits \$500,000 on behalf of the school into the bank. a. On Balance Sheet 2, show what the balance sheet looks like after Pres. Martin’s deposit into the school’s new account at the bank. Again, assume that the bank keeps all of its cash in reserves at the Fed. b. Assuming a reserve ratio of 10%, how much does the bank need to keep in required reserves? Therefore, how much does it have available to loan out? 3. Ever since Covid hit, Pres. Martin has wanted to build a first-class conference facility to facilitate virtual communications both on campus around the world. He convinces St. Edward’s to take out a \$1,200,000 loan with Hilltop Bank to build this new facility. On Balance Sheet 3, show what the Hilltop Bank’s balance sheet looks like after the loan funding is deposited into the school’s account at the bank. 4. Holy Cross Construction gets the contract, and St. Edward’s writes a check for the full amount of the loan to the contractor. a. On Balance Sheet 4a, show what Hilltop Bank’s balance sheet looks like after the check is cashed by Holy Cross Construction’s credit union, UFCU. b. Assume that UFCU’s starting balance sheet has \$1,500,000 in member equity (equivalent to stock shares), \$800,000 in checkable deposits, \$1,000,000 in property, \$600,000 in loans, and the remainder of assets in reserves, before the check to Holy Cross was deposited. On Balance Sheet 4b, show what UFCU’s balance sheet looks like after the check for construction has been deposited by Holy Cross Construction. c. Assuming a 10% reserve ratio, what is UFCU’s required reserves? How much does UFCU now have available to loan out? And what is the total maximum checkable-deposit creation from UFCU’s loan capacity?
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