Given the following balance sheet for the Bank of Chaffey at the start of June,

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.

(e) At the start of June 2, 2001, calculate the economy wide money creating potential of Bank of Chaffey (how much money can the Bank of Chaffey potentially create through the entire banking system). Make sure you show you work.

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

Answer:

a) Total reserves = Deposits with the central bank (Federal reserve) + vault cash

Total reserves = 8000000+4000000 = 12000000

b) Requires reserves = Requires reserve ratio * Bank's total deposits

Requires reserves = 8% * 40000000 = 3200000

c) Excess reserve = Total reserves - Required reserves

Excess reserve = 12000000 - 3200000 = 8800000

d) Since the required reserve ratio is 8%, it means the bank can loan out 92% of the total deposits. It implies the bank can loan out $36800000 (40000000*92%)

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