Suppose the consolidated balance sheet of an economy’s banking system is shown in the following table:
Currency 10 Deposits 2000
Deposits at the central bank 90
Government Bonds 300
Loans Outstanding 1800 Capital 200
Total 2200 Total 2200
In answering the following questions, assume that the banking system is initially in equilibrium and that
the public holds all of its money in the form of deposits in the banking system.
(d) How would your answer to part (c) change if this banking system was subject a “minimum capital
requirement” (in particular, a regulation that requires that the banking system maintain a
Capital/Loan ratio of at least 10%)?
Assets: Currency 10 Deposits at the central bank 90 Government Bonds 300 Loans Outstanding 1800 Total 2200 Liabilities: Deposits 2000 Capital 200 Total: 2200 (d) If this banking system was subject a “minimum capital requirement”, then there will be less loans outstanding and the secondary money supply, so the multiplier effect will be lower.