Suppose that Karen deposits $500 into her checking account at the bank. The rese

Question

Suppose that Karen deposits $500 into her checking account at the bank. The reserve requirement for Karen's bank is 12%. Assume the bank does not want to hold any excess reserves of new deposits.

a. Use this information to complete the table below to show how the bank's assets and liabilities change when Karen deposits the $500.

b. Why are deposits considered liabilities for a bank?

Deposits must be kept as reserves at the Federal Reserve.

Deposits can be withdrawn at any time.

Deposits can be loaned out by the bank.

Deposits pay interest to the owner.

Assets Liabilities Change in reserves: Change in deposits: Change in loans:

Explanation / Answer

The deposits are considered as liability because deposits can be withdrawn at any time. The deposits thus are actually liabilities of the bank which are to be paid to the depositor on demand.

Assets Liabilities Change in reserves: 60 Change in deposits: 500 Change in loans: 440 Change in reserves = 0.12*500 Change in Loans = 500-60 = 40

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