Question

# In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio...

In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first \$30 million of checkable deposits and 12% on any checkable deposits over \$30 million.

 Assets Liabilities Reserves \$18.9 Checkable deposits \$180.0 Loans 150.0 Net worth 20.0 Securities 31.1

Calculate the bank’s excess reserves. (10 points)

Suppose that the bank sells \$5 million in securities to get new cash. Show the bank’s balance sheet after this transaction. What are the bank’s new excess reserves?

(a)

Total checkable deposits = \$180 million

The required reserve ratio is 3% on the first \$30 million of checkable deposits and 12% on any checkable deposit over \$30 million.

Required reserves = (\$30 million * 0.03) + (\$150 million * 0.12) = \$0.9 million + \$18 million = \$18.9 million

Excess reserves = Total reserves - Required reserves = \$18.9 million - \$18.9 million = \$0

The bank's excess reserves are \$0.

(b)

Bank sells \$5 million in securities to get new cash.

Following is the Bank's balance sheet after this transaction -

 Assets Liabilities Reserves \$23.9 Checkable deposits \$180 Loans 150 Net worth 20 Securities 26.1

The bank's new excess reserves is \$5 million.

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