1. Money Creation Process and its Causes The commercial bank has the simplified balance sheet below. (a) Is the bank's balance sheet identity held? Prove your answer. (b) Suppose that an individual deposits $5 , 000 in cash into her checking (demand deposit) account in this bank. (i) What is the immediate effect of the cash deposit on the M1 measure of the money supply? Explain your answer. (ii) What will be the immediate changes in this commercial bank's balance sheet? Explain. Draw the new bank's balance sheet. Is now the balance sheet identity held? Prove your answer. (iii) What is the maximum amount of money this commercial bank can now loan out? Explain how you determined this amount. (iv) What is the maximum change in the amount of money supply as a result of the $5 , 000 deposit by the individual? Give the two ways of calculations. (v) Without using mathematical formula, explain in words why this deposit can lead to a greaterthan-\$5,000 increase in the money supply. (vi) Give two reasons why the money supply may not increase by the amount you identified in point (v). (vii) Would your answers on points (iii) and (iv) change, if it is not a citizen of the country, who deposits his cash in the bank, but a stranger, who arrives from outside this economic system and deposits $5 , 000 of acceptable currency that has never been in the system before? (c) Suppose now that $5 , 000 deposited by the individual is the result of the Central bank's purchase of government bonds from this individual. How would your answers for points (b - i-iv) change? Explain and show the changes in this commercial bank's balance sheet, giving your calculations. (d) Now suppose that in the initial situation the Central bank purchases $5 , 000 worth of government bonds from this commercial bank. How would your answers for points (b - i-iv) change in this case? Explain and show the changes in this commercial bank's balance sheet, giving your calculations. (e) Using your answers for points (c) and (d), make a conclusion, if there is the difference in the consequences of the Central bank's purchase of government bonds from the public or from the commercial banks..

1. 1. Money Creation Process and its Causes The commercial bank has the simplified balance sheet
below. (a) Is the bank's balance sheet identity held? Prove your answer. (b) Suppose that an
individual deposits $5 , 000 in cash into her checking (demand deposit) account in this bank. (i)
What is the immediate effect of the cash deposit on the M1 measure of the money supply?
Explain your answer. (ii) What will be the immediate changes in this commercial bank's balance
sheet? Explain. Draw the new bank's balance sheet. Is now the balance sheet identity held? Prove
your answer. (iii) What is the maximum amount of money this commercial bank can now loan
out? Explain how you determined this amount. (iv) What is the maximum change in the amount
of money supply as a result of the $5 , 000 deposit by the individual? Give the two ways of
calculations. (v) Without using mathematical formula, explain in words why this deposit can lead
to a greaterthan-$5,000 increase in the money supply. (vi) Give two reasons why the money
supply may not increase by the amount you identified in point (v). (vii) Would your answers on
points (iii) and (iv) change, if it is not a citizen of the country, who deposits his cash in the bank,
but a stranger, who arrives from outside this economic system and deposits $5 , 000 of
acceptable currency that has never been in the system before? (c) Suppose now that $5 , 000
deposited by the individual is the result of the Central bank's purchase of government bonds from
this individual. How would your answers for points (b - i-iv) change? Explain and show the
changes in this commercial bank's balance sheet, giving your calculations. (d) Now suppose that
in the initial situation the Central bank purchases $5 , 000 worth of government bonds from this
commercial bank. How would your answers for points (b - i-iv) change in this case? Explain and
show the changes in this commercial bank's balance sheet, giving your calculations. (e) Using
your answers for points (c) and (d), make a conclusion, if there is the difference in the
consequences of the Central bank's purchase of government bonds from the public or from the
commercial banks.