2. Test Yourself Q2 The following tables represent bank balance sheets. Use them

Question

2. Test Yourself Q2 The following tables represent bank balance sheets. Use them to show how the bank's balance sheet changes in each of the following scenarios. Assume the required reserve ratio is 12.5% and that the oversimplified money multiplier formula applies Use the following table to show how the bank's balance sheet changes if you withdraw $100 from your checking account to buy concert tickets Assets Liabilities Reserves: Checking Deposits: Addendum: Changes in Reserves Actual reserves: Required reserves: Excess reserves: The ultimate effect on the money supply will be of

Explanation / Answer

Solution:

Case 1: When 100 $ withdraw from Banks for Concert Tickets

Assets $ Liability $

Reserve reduced by 12.5* Deposit reduced by 100

* As Bank recorded as reserve only 12.5 $ earlier

Actual Reserve $ 125 (Assuming Deposit of $ 1000)

Required Reserve $ 12.5% of Deposit

Excess Reserves: Reserve reduced by $ 12.5

Ultimate effect on Money supply will be Reduced.

Case II

Impect on Bank Balance Sheet of person "in whose account I deposit $ 100"

Assets $ Liability $

Reserve Increased by 12.5* Deposit Increased by 100

* As Bank recorded as reserve only 12.5 $ (100*12.5%)

Actual Reserve $ 125 (Assuming Deposit of $ 1000)

Required Reserve $ 12.5% of Deposit

Excess Reserves:   Reserve Increase by $ 12.5

Ultimate effect on Money supply will be Increase.

Case III

Assets For Hometown Bank $ Liability for Hometown Bank $

Reserve reduced by 62.5* Deposit reduced by 500

* As Bank recorded as reserve only 62.5 $ earlier ( $ 500*12.5%)

Actual Reserve $ 1250 (Assuming Deposit of $ 10000)

Required Reserve $ 12.5% of Deposit

Excess Reserves:   Reserve reduced by $ 62.5

Assets for Big city Bank $ Liability for Big City Bank $

Reserve Increased by 62.5* Deposit Increased by 500

* As Bank recorded as reserve only 62.5 $ (500*12.5%)

Actual Reserve $ 125 (Assuming Deposit of $ 1000)

Required Reserve $ 12.5% of Deposit

Excess Reserves:   Reserve Increase by $ 62.5

Ultimate effect on Money supply will "Not Change".

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