1. What effects do the following transactions have on the demand deposits and re
ID: 1236674 • Letter: 1
Question
1. What effects do the following transactions have on the demand deposits and reserves of Alpha Bank? On the whole commercial banking system? Why? (The required reserve ratio is 20 percent.)a. Ernie Jones withdraws $100 from his demand deposit account in Alpha Bank.
b. Susan Smith borrows $500 from Alpha Bank, but puts the proceeds into Bravo Bank.
c. Betty Cohen deposits $200 in her account at Alpha Bank by a check drawn on someone else's account at Alpha Bank.
d. Susan Smith pays off her loan at Alpha Bank by a check drawn on her account at Alpha Bank.
Explanation / Answer
a. by withdrawing $100 from the demand account, Alpha Bank's demand account is depleted by $100 and their reserves have been diminished by $100 as they are unable to use that reserve to make further loans. On the whole commercial banking system, the same scenario plays out because the whole system is now down $100. b. Alpha Bank's demand account and reserves have been diminished by$500 as they now have $500 less to provide loans with. However, since Susan deposits the money into another bank's account, the whole banking system remains in equilibrium as the banks still have the $500 as reserves to be used for banking needs. c. Alpha bank experiences no change as the money was transferred from one person's Alpha account to another. Therefore Alpha bank still keeps the reserves to be used for other banking needs. The same holds true for the whole commercial banking system. d. This is a bit tricky. I believe what happens here is that Alpha's deposit account diminishes by the loan amount as Susan has used funds from the deposit account. However, since she has paid off the loan, their reserves have gone up. To the whole banking system, nothing changes. I want to be honest, I'm not 100% sure about part d. BOL
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