Question

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent.

Instructions: Enter your answers as whole numbers.

a. What is the maximum amount of new loans that Big Bucks Bank can make?     

    

     Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount.

b. By how much has the supply of money changed?     

    

c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'.

d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make?     

    

     Show in columns 3 and 3' (below) how the bank’s balance sheet will appear after the bank has lent this additional amount.     

     By how much has the supply of money changed?     

    

    How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.
Assets Liabilities and net worth (3) (4) (3) (4) Checkable deposits Reserves 27,000 100,000 Securities 38000 Loans 35000

Answer 1

In the first case, Reserve Ratio : R= 20%. a) In this case, the deckable deposits - $100,000 I Now, aurrount of money that has to be kept with I the bank as Reserves will be 20% of $100,000 = $20,00 0 | w Axioм цлки! how lоаил Нан Big Boel bank can make will be :$(27000 20000) = $7000

The balance sheet after the bank has lent the w additional amount of Resernes will be At first we should determine the aurount of excess Reserves Excess Reserves = Existing Resernes - Required Reserues, --$4100 = $ (27000 - 20000). = $ 7000 .. $7000 can be haned out 7.

(1) Bolos (10) - Asset. ($) T Liabilities ($) Reseries, 20,000 I checkable deposits i logooo Sewrities: 38000 Loans 42000 (+35000 +7090)

b) from the above table, it is evident that the - money supply increases by $7,000 C.) Now, we have to consider the situation where the entire amount of the new loans have been cleared against the bank.. The resulting bank's balance sheet would look like following: Asset($). Liabilities ($) Reserues: 27000 clieckable 107,000 * 20000+ Hvo) | Deposits T= 100000 Sewrites: 38000 I + 7000):. Loans :. 42.000

Resernes would increase by $7000 and the "checkable deposits would also by increase by $7,000. Now, the new reserve ratio: R'=15%. Tu this case, the checkable deposits to is: $100,000 Amount of money that must be kept with the bank, in Resernes, will be: 15% of $100,000. = $15,000 : The maximume amount of new loans that the bank cau make will be : $ (27000-15000) = $12,000 Here, $12,000 is the amount of excess reserues) . The balance-sheet after the bank has leat the additional amount of Resernes in the form of new loan will be in liabilities ($). Cherkable deposit : 100,000 Asset ($) Resernes i 15000 Sewrities. 38000 Loans: 47000 (= 35000 + 12000 from the above table we can say that the money sol I will increase by : $12000

c). Now, if the new loan amount is cleared against the bank, the resulting bank's balance sheet will be: (4.1) Asset ($) Liabilities ($) Reserues : 27000 Checkable 112,000 Deposits : Sewrities : 38000 Loans i 47000 - 15000 +12000)