Use the balance sheet below to answer the following questions. The balance sheet of Tucker National Bank
Assets
Liabilities
required reserves $4000
checkable deposits $20000
EXCESS reserve $16000
loan 0
total $20,000
$20,000
a. The reserve ratio is 20%. Show the new figures for assets and liabilities after the bank makes a $10,000 loan.
b. Explain how a bank increases M1 when it makes a loan.
c. Suppose the borrower spends the $10,000. Explain how this allows another bank to make loans.
Use the balance sheet below to answer the following questions. The balance sheet of Tucker National Bank
| Assets | Liabilities |
| required reserves $4000 | checkable deposits $20000 |
| EXCESS reserve $16000 | |
| loan 0 | |
| total $20,000 | $20,000 |
a. The reserve ratio is 20%. Show the new figures for assets and liabilities after the bank makes a $10,000 loan.
b. Explain how a bank increases M1 when it makes a loan.
c. Suppose the borrower spends the $10,000. Explain how this allows another bank to make loans.
Related textbook solutions
Related questions
1) Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit,
a) Bank A's reserves immediately increased by $______.
b) Bank A's required reserves increased by $______.
c) Bank A's excess reserves increased by $______.
d) Bank A can make a maximum new loan of $______.
e) Checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of $______.
| Assets | Liabilities |
| Reserves +$4000 | Deposits +$4000 |
2) Refer to the table above. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of $______.
3) Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of $______.
|
Assets |
Liabilities |
||
|
Required Reserves |
$40,000 |
Checkable Deposits |
$200,000 |
|
Excess Reserves |
$25,000 |
||
|
Government Bonds |
$100,000 |
||
|
Loans |
$30,000 |
||
|
Building & Fixtures |
$15,000 |
Owner's Equity |
$10,000 |
1. Calculate the required reserve ratio. (Show your work)
2. Assume that Pam wants to borrow money to pay for a new car from Sharpeland Bank.
A. What is the maximum amount that Sharpeland Bank can loan out if it wants to keep all of its bonds?
B. What is the maximum amount that the banking system can create given the balance sheet above?
3. Assume instead that Michael withdraws $10,000 in cash from his checking account at Sharpeland.
A. By how much will Sharpeland Bank's reserves change based on Michael's withdrawal? (Be specific.)
B. What is the immediate effect of the withdrawal on the M1 measure of the money supply? Explain.
C. As a result of the withdrawal, what is the new value of excess reserves for Sharpeland Bank based on the reserve requirement from part (a)?
The money supply expansion process
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $750,000 from Raphael, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.
Complete the following to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans).
a) The Assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000). On the Liabilities side, First Main Street Bank's balance sheet, (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000).
b) Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as a negative number.
| Amount Deposited | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
| (Dollars) | (Dollars) | (Dollars) |
| 750,000 |
c) Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately writes a check for the full amount to Larry. Larry then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Becky.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
| Increase in Checkable Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| Third Fidelity Bank |
d) Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of ($370,000/$3,000,000/$3,750,000) in checkable deposits.
