Question

Section 3: Total Holdings of Banks and Balance Sheet

Assume that in a country the total holdings of banks were as follows:

Bank	Amount in million dollars
Required Reserve	$45
Excess Reserve	$15
Deposits	$750
Loans	$600
Treasury Bonds	$90

1. Show that the balance sheet balances if these are the only assets and liabilities.
2. Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks do not change their holdings of Treasury bonds?
3. How much does the money supply change by?

I know A but B and C I'm having trouble with can you explain in detail please?

Answer 1

Solution :-

Refers to the table :-

Assests	Amount	Liabilities	Amount
Required reserves	$45 million	Deposits	$750 millions
Excess reserves	$15 million
Loans	$600 million
Treasury bonds	$90 million
Total assests	$750 million	Total liabilities	$750 million

If Bank required reserve ration comes to 2% then it should have to maintain it $15 million i.e.

$750*2/100*= $15 million

And dont want to change the Excess raserve then it will also remain as $15 million then, this bank can still loan out $30 million ($45-$15 million) more.

So, money supply will increase by $30 million.