Transaction (3)
Shanghai-Hong Kong Bank makes a loan of $900,000 to Nestle Co.,
(Netherlands). Nestle Co. deposits the cheques in its account with the National Bank of
the Netherlands and asks its bank to credit its account with the equivalent in Dutch
guilders. (The exchange rate on the value date of the transaction is S 0 F1/$ is 2.7750.)
Transaction (4)
The National Bank of the Netherlands makes a loan of $ 750,000 to Nova
Industries (Denmark). Nova Industries uses the loan to settle an import transaction from
Bristol Myers (N.Y.). Bristol Myers maintains its accounts with Chase Manhattan Bank
(N.Y.).
(b) Total amount of Eurodollar deposits created is $1,000,000 (time deposit of Algemene
Bank with Shanghai-Hong Kong Bank denominated in U.S. dollars).
(c) The value of the Eurodollar deposit multiplier here is unity. The value of the
multiplier depends on:
(1) successive stages of time deposits denominated in U.S.dollars placed at financial
institutions outside the continental United States, prior to leakages in the form of
deposits in local currency or payment to U.S. residents, and
(2) The ratio of reserves observed on a voluntary basis by lending institutions outside
the United States.- The following transactions are designed to follow the path of some of the flows that
take place in the Euro-dollar market.
Assume: 1. All foreigners keep their balances in the United States with the Chase
Manhattan Bank.
- All banks keep 10% of their deposits in reserves.
At the end of each transaction determine what the impact is on:- Each of the parties involved.
- The U.S. money supply.
- The U.S. balance of payments on the liquidity basis and on the official transaction
basis. - The money supply of each foreign country involved.
- The balance of payments of each foreign country involved.
Transaction No. 1. The German Central Bank, which maintains part of its foreign
exchange reserve in the form of treasury bills, decides to sell $100 worth of treasury bills
to Mr. Smith, an American resident. Mr. Smith pays with a check drawn on his account
with Chase Manhattan.