Question

# 1. You are given this account for a bank Assets Liabilities Reserves \$450 Deposits \$3000 Loans...

1. You are given this account for a bank Assets Liabilities Reserves \$450 Deposits \$3000 Loans \$2550 The required reserve ratio is 10% a. How much is the bank required to hold as reserves given its deposits of \$3000? 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 \$200 in cash. Show the bank’s new balance sheet, assuming the bank obtains the cash by drawing down its reserves. Assets Liabilities Reserves ____ Deposits ____ Loans \$2550 e. From part d) is the bank meeting the reserve requirement, can lend reserves, or must it borrow reserves?

a. Required reserves = Required reserve ratio*(Deposits) = 10%*(3000) = \$300

b. Excess reserves, ER = Reserves - Required reserves = 450 - 300 = \$150

c. Bank can increase its loans by the amount of excess reserves in the banking system. Thus, it can increase its loans by \$150.

d.

 Assets Liabilities Reserves = 450 - 200 = \$250 Loans = \$2550 Deposits = 3000 - 200 = \$2800

e. Now, required reserves = 10%(2800) = \$280
But the reserves are only \$250. Thus, th bank must borrow reserves.

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