Question

(a)The Vancouver Bank has demand deposits of $ 300 000 and the target reserve ratio is 6 percent. If the bank`s target reserves are equal to its excess reserves, then what must its actual reserves be?

(b)Table Q below represents information on the balance sheet of the Maple Leafs Bank

  

Assets		Liabilities and Equity
Reserves	24,000	Demand Deposits	240,000
Loans	126,000	Equity	40,000
Securities	80,000		Land
Land & Buildings	50,000

(i)Refer to the above information to answer this question. Assume the target reserve ratio is 8 percent. By how much can this bank can safely expand its loans?

(ii)Refer to the above information to answer this question. Assume the target reserve ratio is 8 percent, and the bank gives a loan equal to its excess reserves. The recipient of this loan then writes out a cheque for this amount which is cleared against the bank. At the end of these transactions, what will the bank`s reserves and demand deposits be?

(iii)Refer to the above information to answer this question. Assume the target reserve ratio is 8 percent. If the original balance sheet was for the commercial banking system rather than a single bank, what is the maximum amount by which loans and deposits can be expanded?

(c) Suppose that Bank Apollo has a target reserve ratio of 5%, $10,000 in demand deposits, and $ 1,000 in reserves. Assume the bank makes a loan equal to its excess reserves and the borrower spends this amount at business that does not use Bank Apollo. What is the net effect on Bank Apollo?

(d)Use the following to answer questions below: Assume the Trusty Bnaks`s balance sheet is as follows:

Assets		Liabilities and Net Worth
Reserves	35,000	Demand Deposits	260,000
Loans	200,000	Equity	50,000
Securities	75,000

(i)Refer to the above information to answer this question. If the bank`s target reserve ratio is 10%, which of the following is coorect?

(1)The bank`s reserves are in equilibrium (2)There are excess reserves of $9000

(3)The bank is under-reserved by $9000 (4)There are excess-reserves of $3500

I already know the answer. I just want to know the reason behind the answer and the working

(ii)Refer to the above information to answer this question. If the bank had $2500 in excess reserves what would be its target reserve ratio.

(iii)Refer to the above information to answer this question. Assuming a target reserve ratio of 8 percent how much excess reserves would this bank have after a cheque for $ 10,000 was cleared against it?

Answer 1

i). The bank can safely expand its by 8% of total assets.

Value of total assets = 2,40,000 + 40,000 = 2,80,000

8% of 2,40,000 = 19,200

However the reserves with the bank is 24,000

Thus, it can extend loans by further (24,000-19,200) = 4,800

ii). Excess reserves as found in the previous part = 4,800 = loan extended

reserves will be = 19,200

demand deposits will go down by the amount that has been cleared. Thus demand deposit amount will be 240000-4800 = 2,35,200

d). Target reserve amount = 10/100 * (2,60,000+50,000) = 31,000

But the given balance sheet shows 35,000 as reserves

Thus, there is an excess reserves of 4,000

ii). The bank should have a reserve of 8/100 + (3,10,000 - 10,000) = 24,000