On the assets side of First Main Street Bank\'s balance sheet (before the bank m

Question

On the assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this [decrease OR increases] First Main Bank's [checking account deposits OR loans OR building and furniture OR net worth OR reserves] by [$50,000 OR $1,000,000 OR $500,000 OR $450,000] On the liabilities side of First Main Street Bank's balance sheet, this [decrease OR increases] First Main Street Bank's [checking account deposits OR loans OR building and furniture OR net worth OR reserves] by [$50,000 OR $1,000,000 OR $500,000 OR $450,000].

Because the required reserve ratio is 10%, the $500,000 withdrawal [decrease OR increases] First Main Street Bank's required reserves by [$50,000 OR $100,000 OR $500,000 OR $250,000] In order to maintain the required reserve ratio, First Main Street Bank now must [decrease OR increases] its reserves by [$450,000 OR $400,000 OR $0 OR $250,000]. One possible way to do this is to [decrease OR increase] its outstanding loans.

Assume this process continues, with each successive loan being repaid using a checking account and banks using repayments to replenish their reserves without issuing any new loans. Under these assumptions, the initial destruction of $500,000 by the Fed caused banks to reduce their outstanding loans by [$4,500,000 OR $5,000,000 OR $500,000 OR $2,500,000], resulting in an overall decrease of [$450,000 OR $2,500,000 OR $5,000,000 OR $4,500,000] in checking account deposits.

Explanation / Answer

(1) When you deposti $100 in abank account, to the bank that is a liability - the bank owes you. When you borrow $100 from a bank, to the bank it is an asset - you owe them.

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