Q2/PG.288 – Suppose a bank’s balance sheet looks as follows: Assets Liabilities
ID: 1249150 • Letter: Q
Question
Q2/PG.288 – Suppose a bank’s balance sheet looks as follows:Assets Liabilities
Reserves $450 Deposits $5,000
and banks are required to hold reserves equal to 10% of deposits.
(a) How much excess reserve does the bank hold?
Answer: $4,500
(b) How much more can this bank lend?
Answer: $4,500
Q6/PG.288 – (a) When the reserve requirement changes, which of the following will change for an individual bank (answer “change or “no change”).
Transaction deposits - No Change
Total reserves - Change
Required reserves - Change
Excess reserves - Change
Lending capacity - Change
(b) When the reserve requirements changes, which of the following will change in the total banking system?
Transaction deposits - Change
Total reserves - No Change
Required reserves - No Change
Excess reserves - No Change
Lending capacity - Change
Q8/PG.288 – Suppose that a lottery winner deposits $20 million in cash into her transactions account at the Bank of America. Assume a reserve requirement of 25% and no excess reserves in the banking system prior to this deposit.
(a) Use step 1 in the T-accounts below to show how her deposit affects the balance sheet
at B of A.
(b) Has the money supply been changed by her deposit? Answer: No
(c) Use step 2 below to show the changes at B of A after the bank fully uses its new lending
capacity.
(d) Has the money supply been changed in step 2? Answer: Yes
(e) In step 3 the new borrower(s) writes a check for the amount of the loan in step 2. That
check is deposited at another bank, and B of A pays the other bank when the check clears.
What does the B of A balance sheet look like now?
( f ) After the entire banking system uses the lending capacity of the initial ($20 million) deposit,
by how much will the following have changed?
Total reserves = 8,750,000
Total deposits = 20,000,000
Total loans = 15,000,000
Cash held by public = 20,000,000
The money supply = 35,000,000
Step 1: Winnings Deposited
Bank of America
_____________________________________________________________________________________
Assets Liabilities
(in millions) (in millions)
_____________________________________________________________________________________
Reserves = 20,000,000 Deposits = 20,000,000
Required = 5,000,000
Excess = 15,000,000
Subtotal = 20,000,000
Loans =
Total assets = 20,000,000 Total liabilities = 20,000,000
Step 2: Loans Made
Bank of America
Assets Liabilities
(in millions) (in millions)
Reserves = 20,000,000 Deposits = 20,000,000
Required = 8,750,000
Excess = 11,250,000
Subtotal = 40,000,000
Loans = 15,000,000
Total Assets = 35,000,000 Total Liabilities = 35,000,000
Step 3: Check Clears
Bank of America
Assets Liabilities
(in millions) (in millions)
Reserves = 20,000,000 Deposits = 20,000,000
Required = 5,000,000
Excess = 15,000,000
Subtotal = 20,000,000
Loans =
Total Assets = 20,000,000 Total Liabilities = 20,000,000
Explanation / Answer
Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 20 percent, no loans, and no excess reserves in the banking system prior to this deposit.
(a) Fill in the following table to show how her deposit affects the balance sheet at B of A.
Instructions: Enter your responses to one decimal place.
Step 1: Winnings Deposited Bank of America
Assets (in Millions)
Liabilities (in Millions)
Reserves Required
$ 2.4 million
Demand Deposits
$12 million
Excess
$8.6 million
Subtotal
$12 million
Loans
$0 million
Total Assets
$12 million
Total Liabilities
$12 million
Assets (in Millions)
Liabilities (in Millions)
Reserves Required
$ 2.4 million
Demand Deposits
$12 million
Excess
$8.6 million
Subtotal
$12 million
Loans
$0 million
Total Assets
$12 million
Total Liabilities
$12 million
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