value: 2.42 points Suppose that Big Bucks Bank has the simplified balance sheet
ID: 1105377 • Letter: V
Question
value: 2.42 points Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent. Instructions: Enter your answers as whcle 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 balancc shoet will appcar aftor the bank has lent this additional amount Assets Liabilities and net worth $25,000 S deposits $100,0 38,000 Loans 37,000 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, D, and cbased on the assumption that the reserve ratio is now 15 percont. What is the maximum amount of new loans thot this bank can make? Show in columns 3 and 3 below) how the bank's balanco shect will appear after the bank has lent this additional amount. By how much has the supply of moncy changed? S Assets Liabilities and net worth $25,000$ 38 37 Loans How will the bank's balance sheet appear r 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.Explanation / Answer
(a)
Checkable deposits = $100,000
Required reserve ratio = 20% or 0.20
Required reserves = $100,000 * 0.20 = $20,000
Excess reserves = Total reserves - Required reserves = $25,000 - $20,000 = $5,000
A bank can lend an amount equal to excess reserves it held.
So,
The maximum amount of new loans that Big Bucks Bank can make is $5,000.
Following is the required Balance Sheet -
ASSETS
LIABILITIES AND NET WORTH
1
1'
Reserves
$25,000
$25,000
Checkable deposits
$100,000
$105,000
Securities
$38,000
$38,000
Loans
$37,000
$42,000
(b)
Increase in money supply = Loan amount * (1/Reserve ratio) = $5,000 * (1/0.20) = $25,000
The supply of money will change by $25,000.
(c)
Following is the required balance sheet -
ASSETS
LIABILITIES AND NET WORTH
1
2
1'
2'
Reserves
$25,000
$25,000
$20,000
Checkable deposits
$100,000
$105,000
$100,000
Securities
$38,000
$38,000
$38,000
Loans
$37,000
$42,000
$42,000
(d)
Checkable deposits = $100,000
Required reserve ratio = 15% or 0.15
Required reserves = $100,000 * 0.15 = $15,000
Excess reserves = Total reserves - Required reserves = $25,000 - $15,000 = $10,000
A bank can lend an amount equal to excess reserves it held.
So,
The maximum amount of new loans that Big Bucks Bank can make is $10,000
Following is the required Balance Sheet -
ASSETS
LIABILITIES AND NET WORTH
3
3'
Reserves
$25,000
$25,000
Checkable deposits
$100,000
$110,000
Securities
$38,000
$38,000
Loans
$37,000
$47,000
Increase in money supply = Loan amount * (1/Reserve ratio) = $10,000 * (1/0.15) = $66,666.67
The supply of money will change by $66,666.67
Following is the required balance sheet -
ASSETS
LIABILITIES AND NET WORTH
3
4
3'
4'
Reserves
$25,000
$25,000
$15,000
Checkable deposits
$100,000
$110,000
$100,000
Securities
$38,000
$38,000
$38,000
Loans
$37,000
$47,000
$47,000
ASSETS
LIABILITIES AND NET WORTH
1
1'
Reserves
$25,000
$25,000
Checkable deposits
$100,000
$105,000
Securities
$38,000
$38,000
Loans
$37,000
$42,000
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