Question

Graph the T-accounts using a PEN or a PENCIL. upload the photograph of your graph. The following describes a banking system of a country. i) all banks have the same target reserve ratio of 4% ii) there is a currency drain of 6% iii) initially, banks hold no excess reserves iv) all the money loaned out gets redeposited in another bank

a) An individual deposits their monthly pay of $3,000 in the first bank. On a T-account, show what happens to components of the bank's balance sheet. Show only the IMMEDIATE effects. If there are excess reserves, state how much and how you got the number.

b) How will this bank bring its reserves on target? Explain using a T-account.

c) What is the amount of new desposits that will be created by the entire banking system? No calculations, no marks.

Answer 1

A)

Bank1
Asset		Liability
Reserve(4%)	120	Deposit	3000
Withdraw (6%)	180
Excess Reserve	2700
Total	3000	Total	3000

So, Excess Reserve = 2700

B) Bank can bring its reserves on target by providing incentives to depositers so they don't withdraw much cash. It can be done through giving them interest on their deposits and other facilities like debit card, net banking, UPI payments etc.

Asset		Liability
Reserve(4%)	120	Deposit	3000
Excess Reserve	2880
Total	3000	Total	3000

C) Total Credit Creation = Original Deposit ✕ Credit Multiplier Coefficient

Where,

Credit multiplier coefficient= 1 / r

r = Target Reserve

Total Credit Creation = 3000*1/4%

Total Credit Creation = 75,000