Question

- + Automatie Zoom : Exhibit 1: Bountiful Bank Assets Liabilities $400,000 Reserves Loans Deposits $ 50,000 $350,000 3. Use the balance sheet in Exhibit 1. Suppose the reserve requirement for this bank, Bountiful Bank, is 10 percent. Which of the following statements is (are) correct? (x) Given its current reserves amount, Bountiful Bank is in a position to make a new loan of $10,000 (y) Bountiful Bank has excess reserves in an amount that is more than $9,500 (z) If someone deposits an additional $20,000 of cash into Bountiful Bank, the bank will have more than $25,000 in excess reserves. A. (x). (y), and (z) B (x) and (y) only C. (x) and (2) only D (y) and (z) only E. (Z) only 4. Suppose that the reserve ratio is 12.5 percent. According to the textbook, an additional $5,000 of excess reserves has the potential to increase the money supply by A $10.000 B $12.500 C. $40,000 D $80.000 E $125,000

Answer 1

Ans:

3)

Option A

(X), (Y), and (Z)

Explanation

Required reserves = Deposits * required reserve ratio

= $400,000 * 10%

= $40,000

Excess reserves = reserves - required reserves

= $50,000 - $40,000

= $10,000

If additional $20,000 is deposited, the bank will have more than $25,000 in excess cash.

4)

Option C

Increase in money supply = $40,000

Explanation

Increase in money supply = change in reserves / required reserve ratio

= $5000 / 0.125

= $40,000