Question

Central Banks System
Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will
make loans in the full amount of any excess reserves that they acquire and will immediately be able to
eliminate loans from their portfolio to cover inadequate reserves.
Assets Liabilities
(in Billions)
(in Billions)

Tota reserves $150 Transactions accounts $500

Securities $150
Loans $200

Total $500   Total $500

You are required to answer the following Questions:
1) What is the reserve requirement ratio?
2) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the
total banking system after all banks have fully utilized their lending capacity.
3) By how much has the money supply changed as a result of the lower reserve requirement (step b)?

4) Suppose the central bank now buys $10 billion of securities directly from the banks. What will the
banks’ books look like after this purchase?
5) How much excess reserves do the banks have now?
6) By how much can the money supply now increase?

Answer 1

1)

Out of the deposits of 500 million , loans of 200 million have been sanctioned .

Therefore Reserves = 500-200=300 million

Reserve Requirements Ratio = (300/500)*100

=60%

2)

BALANCE SHEET

Assets	Amount(in millions)	Liabilities	Amount(in million)
Reserves	25	Transactions Account	500
Securities	150
Loans	325
Total	500	Total	500

Note :-

1) Required Reserves = 5% of 500=25 million

2) Excess Reserve = 150-25=125

3) Loan amount = 200+125=325 million

3)

= 125*(1/0.05)=2500 million

4)

BALANCE SHEET

Assets	Amount	Liabilities	Amount
Reserves	35	Transactions Account	500
Securities	140
Loans	325
Total	500		500

Effect :-

+10 million in reserve

- 10 million in Securities

5)

Excess Reserve = 10 million (35-25)

6)

= 10*(1/0.05)

=200 million