Question

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?

Answer 1

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.