A simplified balance sheet for the local bank is shown below. The required reser

Question

A simplified balance sheet for the local bank is shown below. The required reserve ratio is 20%. All figures are in thousands. (2 points) 6. Assets Liabilities and net worth heckable $5000 eserves $1200deposits ecurities 750Stock shares 1000 oans Property550 3500 How much is this bank currently required to hold in reserve? How much does the bank currently hold in excess reserves? Suppose the bank lends out the full amount of its excess reserves. Modify the balance sheet to reflect the creation of the loan. By how much has the money supply increased as a result of the loan? a. b. c. d. Suppose the borrower of the new loan writes a check for the amount of the loan to purchase new equipment for her business. The equipment seller then deposits the check in an out-of-town bank. Show the new balance sheet for this local bank once the check has cleared. Once the check has cleared, does the local bank have any excess reserves? e.

Explanation / Answer

A bank is required to hold in reserves as much as a percentage prescribed by the federal bank. Here the bank is having deposits of $5000000 and its required reserve ratio is 20%. Therefore, the bank has to maintain 20% on $5000000 = $1000000

Excess reserves are calculated as below:

Deposits – Required Reserves = $5000000 - $1000000 = $4000000

But the bank has already loaned out $3500000

Therefore, the bank current holds $500000 ($4000000 - $3500000) in excess reserves.

If the bank lends out the remaining balances of excess reserves its balance sheet may appear as below:

Federal banks may control the amount of money supply through amending the required reserve ratio and thereby changing the amount of loanable funds. Here the bank is still able to issue loans to customers to the tune of $500000 and accordingly this amount has flows into the economy.  

ASSETS $ in '000 LIABILITIES & NET WORTH $ in '000 Reserves 700 Deposits 5000 Securities 750 Stock shares 1000 Loans 4000 Property 550 6000 6000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.