Question

Exercise 2

Below is the balance sheet of BOA:

Assets	Liabilities
Reserves :   $300,000	Deposits $ 500,000
Required $100,000	Net Worth
Excess
Loans
Total     $ 800,000	Total :

1. Calculate the Values of Net Worth, Total Liabilities, Excess and Loans
2. Calculate the required reserve ratio
3. By how much can the bank lend out and by how much will money supply increase

If the required reserve ratio falls to 15% and Bank BOA continues to hold 300,000 as reserves, will there be excess reserves?

Answer 1

Total assets = $800,000

Total assets equals total liabilities.

So, total liabilities is $800,000.

Net worth = Total liabilities - Deposits = $800,000 - $500,000 = $300,000

So, net worth is $300,000.

Excess reserves = Actual reserves - Required reserves = $300,000 - $100,000 = $200,000

So, excess reserves is $200,000.

Loans = Total assets - Reserves = $800,000 - $300,000 = $500,000

So, the loan is $500,000.

Calculate the required reserve ratio -

Required reserve ratio = Required reserves/Deposits = $100,000/$500,000 = 0.2 or 20%.

The required reserve ratio is 20%.

A bank can lend an amount equal to the excess reserves it held. The amount of excess reserves is $200,000.

So, the bank can lend out $200,000.

Calculate the increase in money supply -

Increase in money supply = Excess reserves * (1/Required reserve ratio)

Increase in money supply = $200,000 * (1/0.20) = $1,000,000

The money supply will increase by $1,000,000.

Now, the required reserve ratio decreases to 15%.

New required reserve ratio = 15% or 0.15

Deposits = $500,000

Required reserves to be maintained = Deposits * New required reserve ratio = $500,000 * 0.15 = $75,000

Excess reserves = Total reserves - Required reserves to be maintained = $300,000 - $75,000 = $225,000

Thus,

If the required reserve ratio falls to 15% and Bank BOA continues to hold 300,000 as reserves then there will be excess reserves of $225,000.