Question

2.5 You are given this account for a bank: Assets Reserves Loans $1,200 6,800 $8,000 Liabilities Deposits The required reserve ratio is 10 percent.  

a. How much is the bank required to hold as reserves given its deposits of $8,000?  

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 $500 in cash. Show the bank’s new balance sheet, assuming the bank obtains the cash by drawing down its reserves. Does the bank now hold excess reserves? Is it meeting the required reserve ratio? If not, what can it do?

Answer 1

Answer – Given Balance sheet

ASSETS		LIABILITIES
Reserves	1200	Deposits	8000
Loans	6800
	8000		8000

a. Required reserve ratio = 10 %

Therefore it is required to hold 10% of 8000$ = 800 $

b. Excess reserves = Total reserves – Required reserves = 1200 – 800 = 400 $

c. Bank can increase its loan by 400 $, which it hold as excess reserves and can lend it as loans.

d. When depositor withdraws 500$ in cash, deposits will fall by 500$ and in Asset side. The bank has now no Excess Reserves. Excess reserves that it previously hold will fall by 400$ and rest 100$ will come from required reserves. With that new reserve requirement will be 10% of Deposits (7500$) = 750$. The bank has now 700$ (Reserves 1200$ - Cash withdrawn 500$), which is 50 $ less than minimum Required Reserves.

Therefore the bank will borrow 50$ from interbank market or Central bank to fulfil its reserve requirement.

ASSETS		LIABILITIES
Reserves	750	Deposits	7500
Excess Reserves	0	Interbank Market	50
Loans	6800
	7550		7550