Question

Use the following balance sheet for Bank Q to answer the next two questions. Assume the required reserve ratio is 0.25.

Assets	Liabilities
Total Reserves = $12,000	Deposits = $
Loans = $20,000	Loans from the Fed = $3000
Securities = $11,000
$43,000	$43,000

1. Bank Q has ___ of excess reserves.
   1. $12,000
   2. $10,000
   3. $5,000
   4. $2,000

2. Based on Bank Q’s balance sheet, how much money can the banking system create?
   1. $160,000
   2. $12,000
   3. $8,000
   4. $40,000

Use the following information to answer the following three questions. Bank T has $7,000 deposited with the Federal Reserve, $3,000 in vault cash, and is holding $25,000 of securities. It has $100,000 in checkable deposits and no loans from the Federal Reserve. Assume the required reserve ratio is 0.05.

3. How many dollars of total reserves is Bank T holding?
   1. $5,000
   2. $3,000
   3. $28,000
   4. $10,000

4. Bank T is required to hold ___ as required reserves.
   1. $250
   2. $5,000
   3. $1,250
   4. $3,000

5. Bank T can create ___ of new money.
   1. $100,000
   2. $5,000
   3. $2,000
   4. $0

Answer 1

Part 1:

Bank Q's balance sheet is given as below

Assets	Liabilities
Total Reserves = $12,000	Deposits = $40,000
Loans = $20,000	Loans from the Fed = $3,000
Securities = $11,000
Total = $43,000	Total = $43,000

Question 1:

Required reserve ratio = 0.25

Required reserves = Deposits x Required reserve ratio = $40,000 x 0.25 = $10,000

Total reserves of the bank = $12,000

Excess reserves = Total Reserves - Required reserves = $12,000 - $10,000 = $2,000

Ans: Option D

Question 2:

Money multiplier = 1/required reserve ratio = 1/0.25 = 4

The total money that the bank can create = Excess reserves x Money multiplier = $2,000 x 4 = $8,000

Ans: Option C

Part 2:

For Bank T,

Reserves deposited with the Federal Reserve = $7,000

Vault cash (also considered a part of reserve) = $3,000

Securities = $25,000

Checkable deposits = $100,000

Question-1:

Total Reserves = Reserves deposited with Fed + Vault cash = $7,000 + $3,000 = $10,000; Ans: Option D

Question-2:

Required reserve ratio = 0.05

Required reserves = Checkable Deposits x Required reserve ratio = $100,000 x 0.05 = $5,000

Ans: Option B

Question-3:

Money multiplier = 1/required reserve ratio = 1/0.05 = 20

Excess Reserves = Total Reserves - Required reserve = $10,000 - $5,000 = $5,000

The total money that Bank-T can create = Excess reserves x Money multiplier = $5,000 x 20 = $100,000

Ans: Option A