Given the following balance sheet for the Bank of Chaffey at the start of June,
ID: 1211486 • Letter: G
Question
Given the following balance sheet for the Bank of Chaffey at the start of June, 2 2001 and that the required reserve ratio is 8%:
Assets
Liabilities
$2,000,000 Corporate Bonds
$40,000,000 Demand Deposits
$6,000,000 T-bonds
$5,000,000 Car Loans
$8,000,000 Business Loans
$7,000,000 Credit Card Loans
$8,000,000 Deposit with the Federal Reserve
$4,000,000 Vault Cash
$40,000,000 Total
$40,000,000 Total
(a) Calculate the Bank of Chaffey’s Total Reserves at the start of June 2, 2001 (show how you calculated your answer).
(b) Calculate the Bank of Chaffey’s Required Reserves at the start of June 2, 2001 (show how you calculated your answer).
(c) Calculate the Bank of Chaffey’s Excess Reserves at the start of June 2, 2001 (show how you calculated your answer).
(d) At the start of June 2, 2001, determine the amount of money the Bank of Chaffey can legally loan out. Explain your answer.
Assets
Liabilities
$2,000,000 Corporate Bonds
$40,000,000 Demand Deposits
$6,000,000 T-bonds
$5,000,000 Car Loans
$8,000,000 Business Loans
$7,000,000 Credit Card Loans
$8,000,000 Deposit with the Federal Reserve
$4,000,000 Vault Cash
$40,000,000 Total
$40,000,000 Total
Explanation / Answer
(a) Calculate the Bank of Chaffey’s Total Reserves at the start of June 2, 2001 (show how you calculated your answer).
Total Reserves = Deposit with the Federal Reserve + vault cash = $8,000,000 + $4,000,000
= $12,000,000
(b) Calculate the Bank of Chaffey’s Required Reserves at the start of June 2, 2001 (show how you calculated your answer).
Required Reserve = reserve requirement*Demand Deposits = 0.08*$40,000,000 = $ 3,200,000
(c) Calculate the Bank of Chaffey’s Excess Reserves at the start of June 2, 2001 (show how you calculated your answer).
Excess Reserve = Total Reserve - Required reserve = $12,000,000 - $3,200,000
= $8,800,000
(d) At the start of June 2, 2001, determine the amount of money the Bank of Chaffey can legally loan out. Explain your answer.
Mooney legally loan out = Excess reserve = $8,800,000
As from total reserves after keeping the required reserves, the excess reserve which is left, Bank is free to loan out that amount.
So, in this case excess reserve is $8,800,000, hence Bank can lend out this amount.
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