Suppose that the T-account for Black Rock National Bank is as follows; Assets ;

Question

Suppose that the T-account for Black Rock National Bank is as follows;

Assets ; reserves = $100,000......... Loans = $400,000

Liabilities: Deposits = $500,000

a) What is the reserve deposit ratio of Black Rock National Bank?

b) If the feds requires banks to hold 10% of the deposits as reserves, how much in excess reserves does Black Rock bank hold?

c) Supoose households' liquidity preference is 5%, if BRNB reduces its reserves to only the required amount , by how much would the economy's money supply increase?

PLEASE SHOW ALL WORKING

Explanation / Answer

a) Since, reserves is $ 100,000 while deposits are $ 500,000. So,

Reserve deposit ratio = (100,000 / 500,000) X 100 = 20%

b) If Fed require banks to hold 10% then, required reserve of bank will be: 10% of $ 500,000 = $ 50,000

Excess reserves = Total reserves - Reserve requirement = $ 100,000 - $ 50,000 = $ 50,000

c) If households' liquidity preference is 5% and BRNB reduces its reserve to only required amount that means bank will keep reserve of 5% of their deposits.

New reserve = 5% of $ 500,000 = $ 25,000

It means reserves of bank decreases by $ 25,000 so money supply increases by $ 25,000 as bank will lend this amount.

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