Problem Set #7: Suppose Al has a checking account in Bank A, and Bob has a check

Question

Problem Set #7:

Suppose Al has a checking account in Bank A, and Bob has a checking account in Bank B. Banks A and B each have $100,000 in deposit liabilities and $30,000 in reserves, and the required reserve ratio is 20%. Show what happens to each bank’s deposit liabilities, reserves, and excess reserves if Al writes a check for $10,000 to Bob, Bob deposits the check into his account at Bank B, and Bank B collects from Bank A.






Problem Set #8:

Suppose in the banking system as a whole, demand deposits are equal to $80,000,000 and reserves are equal to $17,000,000 with a legal reserve ratio of 10%. If the Fed doubles the required ratio, by how much will the money-creating potential (also known as the maximum lending potential) of the banking system as a whole drop?

Explanation / Answer

Problem Set #7:
Suppose Al has a checking account in Bank A, and Bob has a checking account in Bank B. Banks A and B each have $100,000 in deposit liabilities and $30,000 in reserves, and the required reserve ratio is 20%. Show what happens to each bank’s deposit liabilities, reserves, and excess reserves if Al writes a check for $10,000 to Bob, Bob deposits the check into his account at Bank B, and Bank B collects from Bank A.

BANK A:

LIABILITIES: Begin with $100,000

Al writes a check for $10,000, which becomes a liability for Bank A.

Thus Bank A's liabilities are now $110,000

RESERVES: Begin with $30,000 (remain the same)

EXCESS RESERVES: Begin with (30,000 x 0.8) = $24,000 (remain the same)

BANK B:

LIABILITIES: Begin with $100,000 (remain the same)
RESERVES: Begin with $30,000; since we receive a $10,000 check, we now have $30,000 + $10,000 = $40,000 in reserve
EXCESS RESERVES: Begin with (30,000 x 0.8) = $24,000

Now we have $40,000 on reserve, so the new excess reserves are

$40,000 x 0.8 = $32,000

**While I would love to help you with problem #8, Cramster's Terms & Conditions only allow me to answer ONE question per post! I'd really hate to see either of our accounts deleted, so if you'll repost #6 as a separate question, I'll be more than happy to help you! :) **

I hope that you found this answer useful towards your studies. It took quite some thought and effort to compose, and and I'd greatly appreciate a lifesaver rating! It would really make my day! :)

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