Question

# Assume that a bank has on its asset side reserves of 500 and loans of 3000...

Assume that a bank has on its asset side reserves of 500 and loans of 3000 and on its liability side deposits of 3500. Assume that the required reserve ratio is 10 percent. (a) How much is the bank required to hold as reserves given its deposits of 3500? (b) How much are its excess reserves? (c) By how much can the bank increase its loans? (d) Suppose a depositor comes to the bank and withdraws 400 in cash. Show the bank’s new balance sheet, assuming the bank obtains the cash by drawing down its reserves. Does the bank now hold excess reserves? Is it meeting the required reserve ratio? If not, what can it do?

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#### Homework Answers

Answer #1

1). The bank is required to hold the reserves which equal = deposits * required reserve ration = 3500 * (10/100) = \$350

2). Excess reserves = Current reserves - required reserves = 500 - 350 = \$150

3). The bank can increase its loans by \$150, which is the value of the excess reserves.

4). Liabilities Assets

Deposits 3100 Reserves 100

Loans 3000

NO the bank does not hold excess reserves

It does not meet the minimum reserve requirement either. This is because the required reserves should be \$310. It should increase its required reserves by reducing its loan lendings, or should increase its deposits and keep a reserve deposit ratio of more than 10% until the reserves equal 10% of the total deposits.

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