5. Jack deposits his money at Bank 1, while Maria deposits her money at Bank 2.
ID: 1204667 • Letter: 5
Question
5. Jack deposits his money at Bank 1, while Maria deposits her money at Bank 2. Balance sheets for each bank are listed below.
Bank 1
Assets
Reserves $200,000
Property 600,000
Loans 600,000
Liabilities + Net Worth
Checkable deposits $ 400,000
Stock shares 1,000,000
Bank 2
Assets
Reserves $150,000
Property 250,000
Loans 600,000
Liabilities + Net Worth
Checkable deposits $300,000
Stock shares 700,000
a) What will the banks’ balance sheets look like when Jack writes a $50,000 check to Maria and the check clears? (Show the balance sheets for both banks after the transaction) (4 pts)
b) The reserve ratio is 20%. What are each bank’s excess reserves after the check clears in (a)? (2 pts)
(c) How many additional loans can each bank make if Jack were to write Maria another check for $100,000? (2 pts)
Explanation / Answer
(a) What will the banks’ balance sheets look like when Jack writes a $50,000 check to Maria and the check clears?
See balance sheets below:
Bank 1
Assets
Liabilities+ net worth
Reserves $150,000
Property 600,000
Loans 600,000
Checkable deposits $350,000
Stock shares 1,000,000
Bank 2
Assets
Liabilities+ net worth
Reserves $200,000
Property 250,000
Loans 600,000
Checkable deposits $350,000
Stock shares 700,000
(b) The reserve ratio is 20%. What are each bank’s excess reserves after the check clears in (a).
Bank 1 has excess reserves of $80,000 [$150,000 – ($350,000 ´ 0.2)].
Bank 2 has excess reserves of $130,000 [$200,000 – ($350,000 ´ 0.2)].
(c) How many additional loans can each bank make when Jack writes Maria another check for $100,000?
The check reduces Bank 1’s reserves to $50,000 which is exactly 20% of their remaining $250,000 checkable deposits. This means that Bank 1 cannot make any more additional loans. The check increases Bank 2’s reserves to $300,000 and checkable deposits to $450,000. At the current reserve ratio that means Bank 2 must hold $90,000 in reserves, and so Bank 2 has $210,000 available for additional loans.
Assets
Liabilities+ net worth
Reserves $150,000
Property 600,000
Loans 600,000
Checkable deposits $350,000
Stock shares 1,000,000
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