4. In the following bank balance sheet, amounts are in millions of dollars. The
ID: 2543762 • Letter: 4
Question
4. In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first $30 million ofcheckable deposits and 12% on any checkable deposit over $30 million. (3 points) Assets Equity and Liabilities Reserves $18.9 Loans Securities $31.1 Net worth Checkable deposits $20 $180 $150 Total $200 Total $200 a. Calculate the bank's excess reserves b. Suppose that the bank sells $5 million in securities to an investor. Show the bank's balance sheet after this transaction. Now what are the bank's excess reserves?Explanation / Answer
a. Excess Reserves = $ 18.9 million (Given) - $ {(3/100) × 30 + (12/100) × (180-30)} million
= $ 18.9 million - $ {( 0.03 × 30) + (0.12 × 150)} million
= $ 18.9 million - $ (0.9+18) million
Excess Reserves = $ 18.9 million - $ 18.9 million = 0 (nil)
b. The $5 million sale of securities is directly transferred into the reserves of the bank. This increases reserves by $5 million from $ 18.9 million to $23.9 million, but since this was a sale of securities there is no change in checkable deposits immediately following the transaction (. The fact that checkable deposits have not changed implies that the required reserves have not change, so required reserves still equal $ 18.9 million).
Therefore Excess Reserves = $ 23.9 million - $ 18.9 million = $ 5 million
Revised Balance Sheet
Assets $ Million Equity & Liabilities $ Million
Reserves 23.9 Networth 20
Loans 150 Checkable Deposit 180
Securities 26.1
Total 200 200
c.
Revised Balance Sheet
Assets $ Million Equity & Liabilities $ Million
Reserves 18.9 Networth 20
Loans 155 Checkable Deposit 180
Securities 26.1
Total 200 200
Excess Reserves = $ 18.9 million (Given) - $ {(3/100) × 30 + (12/100) × (180-30)} million
= $ 18.9 million - $ {( 0.03 × 30) + (0.12 × 150)} million
= $ 18.9 million - $ (0.9+18) million
Excess Reserves = $ 18.9 million - $ 18.9 million = 0 (nil)
d.
Revised Balance Sheet
Assets $ Million Equity & Liabilities $ Million
Reserves 18.9 Networth 20
Loans 150 Checkable Deposit 175
Securities 26.1
Total 195 195
Excess Reserves = $ 18.9 million (Given) - $ {(3/100) × 30 + (12/100) × (175-30)} million
= $ 18.9 million - $ {( 0.03 × 30) + (0.12 × 145)} million
= $ 18.9 million - $ (0.9+17.4) million
Excess Reserves = $ 18.9 million - $ 18.3 million = $ 0.6 million
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