APPLICATION Suppose that the reserve requirement is 10% on all deposits and the
ID: 2495470 • Letter: A
Question
APPLICATION
Suppose that the reserve requirement is 10% on all deposits and the balance sheet of People’s National Bank looks like the following (in billions):
Assets
Vault Cash $555
Reserves at the Fed $545
Loans Outstanding $657
Securities $1100
Buildings & Equipment $1400
Other Assets $2115
Liabilities
Demand Deposits $545
Savings Deposits $7245
Time Deposits $2210
Other Liabilities $785
Net Worth ??
What is the “Net Worth” of the bank?
2. What is the dollar value of required reserves for People’s National Bank?
3. Does the bank have any excess reserves?
4. What is the maximum amount of new loans the bank can extend?
5. Indicate how the bank’s balance sheet would be altered if it made these new loans.
6. Suppose that the required reserves were 20 percent; if this were the case, would the bank be in a position to extend any additional loans? Would it satisfy the reserve requirement?
2. Imaging the FED engages in an open market sale of $25 million; using a balance sheet for both the bank and the FED, illustrate the changes.
3. If an individual moves $500 from their checking to their savings, how will this affect M), M1, M2, and M3? What about moving funds from savings to checking?
Explanation / Answer
1.
Net worth = Total Assets – Total Liabilities
Total Assets = Vault Cash + Reserves at the Fed + Loans Outstanding + Securities + Buildings & Equipment + Other Assets
Total Assets = 555 + 545 + 657 + 1100 + 1400 + 2115 = $6372
Total Liabilities = Demand Deposits + Savings Deposits + Time Deposits + Other Liabilities
Total Liabilities = 545 + 7245 + 2210 + 785 = $10785
Net Worth = Total Assets – Total Liabilities = 6372 – 10785
Net Worth = - $4413
2.
Total deposits = Demand deposits + saving deposits + time deposits
Total deposits = 545 + 7245 + 2210 = 10000
Reserve ratio = 10%
Thus,
Required Reserve = 10000*10% = $1000
3.
Total Reserve = Vault Cash + Reserve at the Fed
Total Reserve = 555 + 545 = $1100
Excess Reserve = Total Reserve - Required Reserve
Excess Reserve = 1100 – 1000 = $100
Thus, there is an excess reserve.
4.
Excess reserve of $100 can be issued as a new loan by the bank.
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