Suppose that the reserve requirement is 3% on the first 30 million of checkable

Question

Suppose that the reserve requirement is 3% on the first 30 million of checkable deposits and 10% on the checkable deposits in excess of 30 million. (Amounts on the balance sheet are in millions of $)

Assets- Reserves 15.9, Loans 150.0, Securities 34.1 total 200.0. Liabilities + Capital- Transactions Deposits- 180.0, Equity Capital 20.0 total - 200.0. A-Calcualte the banks excess reserves. B-Suppose that the bank sells 5 million in securities to get new cash. Show the banks balance sheet after this transactioin. What are the bank's excess reserves? C- Suppose that the bank makes a loan to a customer equal to the amount of its excess reserves from part B. Show the bank's balance sheet before the customer spends the proceeds of the loan. What are the bank's excess reserves? D- Suppose that the customer spends the proceeds of the loan. Show the banks's balance sheet, and calculate its excess reserves.

Explanation / Answer

The required reseve of bank at 3%= 0.03*3000000 = 90000 Bank Excess reserves = 3000000-90000= $2910000 Remaining securities after selling = 3400000-500000 = $2900000 Banks excess reserve becomes = 3000000+2900000= 5900000*0.03= 177000 so it becomes = 5900000-177000= $5723000

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