1) Imagine that Kristy deposits $10,000 of currency into her checking account de
ID: 1204798 • Letter: 1
Question
1) Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy’s deposit,
a) Bank A's reserves immediately increase by $______.
b) Bank A's required reserves increase by $______.
c) Bank A’s excess reserves increase by $______.
d) Bank A can make a maximum new loan of $______.
e) Checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of $______.
2) Refer to table above. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of $______.
3) Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of $______.
Assets Liabilites Reserves +$4000 Deposits +$4000Explanation / Answer
(1) New deposit = $10,000.
(a) Bank A's reserves increase by $10,000
(b) Bank A's required reserves increase by $10,000 x 20% = $2,000
(c) Bank A's excess reserves increase by $(10,000 - 2,000) = $8,000
(d) Bank A can make a loan of maximum $ 8,000 (Only the excess reserve component).
(e) Deposits will increase a maximum of (Initial deposit / Required reserve ratio) = $10,000 / 0.2 = $50,000
(2)
New deposit = $4,000
Increase in total reserves = $4,000
Required reserves = $4,000 x 10% = $400
Excess reserves = $(4,000 - 400) = $3,600
(3) When bank has no excess reserves, its total reserve = Required reserve
When required reserve ratio is 20%, required reserve = Total reserve = $100 million x 20% = $20 million
When required reserve ratio is 15%, required reserve = $100 million x 15% = $15 million
Excess reserve = Total reserve - new required reserve = $(20 - 15) million = $5 million
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