Use the followingto answer questions 13 -14 Answer the next questionfs) on the b

Question

Use the followingto answer questions 13 -14 Answer the next questionfs) on the basis of the following table for a commercial bank or thrift: Reserve requirement Checkable Actual Fxcess reserve reserve deposits S100,(0 percent $ 10,000 20,000 S 12,000 8,000 200,010 300,000 12 7000 23. Befer to row 3 in the above table. The number appropriate for space Y is: S24,000 T S32.000. C S48,000. $96,000, 24. Refer to row 4 in the above table. The number appropríate for space Z is: A) $10,000. B) S70,000 C) $48.000 D) zerU 25. Banks crcate oncy when they: A) add to their reserves in the Federal Reserve Bank. B) accept deposits of cash C) scll govemment bonds. D) exchange checkable deposits for the lOU's of businesses and individuals. Use the following to answer question 26: Answer the next questions) on the basis of the following balance sheet for the First National Banl of Bunco. All figures are in millions Assets 520 25 Checkable Deposits Capital Stock S100 50 Reserve ProTeny 90 the above data. If the lega I reserve ratio is 14 percent, suppose that customers of this 26. Refer to in the amount of 56 million. As a result, the bank collectively write checks for cash at the bank ban excess reserves diminish to: A) S0 B) St million. Ci $.72 nillion. D) S.%A million

Explanation / Answer

23. The number appropriate for space Y is equal to actual reserves at the required reserve ratio of 12%.

Now, when reserve ratio =12% , then Required reserves= 12% (checkable deposits)

Required reserves = 12% (200,000)

= 24,000

Actual reserves = required reserves + excess reserves

Excess reserves when required reserve ratio =12% is 8,000.

Actual reserves = 24,000 + 8,000

Actual reserves = 32,000

So, the number appropriate for space Y is 32,000.

Therefore, option (B) is correct .

24. The number appropriate for space Z is excess reserves.

Now, reserve ratio = 20%

Required reserves = 20% (checkable deposits)

= 20% (300,000)

= 60000

Actual reserves = 70,000 (given)

Actual reserves = required reserves + excess reserves

Excess rerves = Actual reserves - required reserves

Excess reserves = 70,000 - 60,000

Excess reserves =10,000

So, the number appropriate for space Z is 10,000.

Therefore, option (A) is correct.

25. Banks create money when they exchange checkable deposits for IOU's of businesses and individuals.

Therefore, option (D) is correct.

26. Legal reserve ratio = 14%.

Suppose that customers of this bank collectively write checks for cash at the bank in the amount of $6 million.

Checkable deposits = $100 (given)

Now, required reserves = 14%(100) = 14

And actual reserves = $20 (given)

Therefore, excess reserves = Actual reserves - required reserves

=$20 -$14

Excess reserves = $6

Now, when customers writes checks for cash at the bank in the amount of $6 million, this will reduce checkable deposits and actual reserves.

Therefore, now, Actual reserves = $ (20-6 ) = $14

And checkable deposits = $(100 -6) = $94

Now, required reserves = 14%(94)

required reserves = $13.16

Excess reserves = Actual reserves - required reserves

= $ (14 - 13.16) = $0.84

Excess reserves = $0.84.

Hence , ecxess reserves diminish to $0.84 million.

Therefore, option (D) is correct.

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