APEcon
12-13
Name:__________________________
Time Value of Money and Money Creation Questions
1) You are planning on attending a local college; they have offered you several different
payment options for tuition. They are allowing you to either pay tuition at the beginning of
the semester or the same amount at the end of the semester, and you can take the money
from an interest bearing account that you already have, or you will have to borrow it.
Describe your decision and financial reasoning.
-Pay as late as possible
-Borrow or used saved money depends upon the interest rate you will pay to borrow versus the
interest rate you are earning to save.
2) Suppose that the interest rate is 4%. What is the future value of $100 in 4 years? What
would be the difference if the interest rate was 6%?
$100 in 4 years @ 4%= $116.99
$100 in 4 years @ 6%= $126.25
3) Suppose that you desire to get a lump sum payment of $100,000 2 years from now. How
many current dollars will you need to invest today at a 10% interest rate to accomplish
your goal?
$82,644.63
4) What is the difference between an asset and a liability on a bank’s balance sheet?
Liability= Bank owned (Deposited Money)
Asset= Bank owes (Reserves, Loans)
5) Why is the United States banking system referred to a fractional reserve bank system? What
is the role of deposit insurance in a fractional bank system?
Fractional Reserve Banking means that a bank is only required to hold a portion of all deposited
money in their reserves. The FDIC is crucial to the system because it gives bankers the confidence
that a their money is safe regardless of a banks decisions.
APEcon
12-13
Name:__________________________
6) Suppose that Serendipity Bank has excess reserves of $8000 and checkable deposits of
$150,000. If the reserve ratio is 20%, what is the size of the bank’s actual reserves?
Actual Reserves= $38,000
Required= $30,000
Excess= $8,000
7) 3rd National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve
ratio is 20%. Households deposit $5000 in currency into the bank and that currency is
added to reserves. What level of excess reserves does the bank have now?
Excess Reserves= $4,000
8) The balance sheet below is for Big Bucks Bank. The reserve ratio is 20%.
Assets
Liabilities
Reserves $22,000
Checkable Deposits $100,000
Securities $38,000
Loans $40,000
a. What is the maximum amount of new loans that Big Bucks Bank can make?
$2,000= Excess Reserves
b. By how much has the supply of money changed?
$40,000 increase in Money Supply
c. How will the bank's balance sheet appear after the loans are repaid back to the bank?
Excess Reserves increase by $40,000 if loans are repaid.
d. Repeat steps a,b,c with a reserve ratio of 15%