Suppose the Continental Bank has the following simplified balance sheet. The res
ID: 2792695 • Letter: S
Question
Suppose the Continental Bank has the following simplified balance sheet. The reserve ratio is 20 percent Liabilities and net worth Assets Reserves $22,000- Securities Loans Demand deposits $100,000 38,000 40,000 a. What is the maximum amount of new loans which this bank can make? Show in column 1 how the bank's balance sheet will appear after the bank has loaned this additional amount. b. By how much has the supply of money changed? Explain. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against this bank? Show this new balance sheet in column 2 c. Liabilities and net worth Assets Reserves Securities Loans Demand deposits $100,000 38,000 40,000_ Now assume the reserve ratio (R) is 15%. What is the maximum amount of new loans which this bank can make? Show in column 1 how the bank's balance sheet will appear after the bank has loaned this additional amount By how much has the supply of money changed? d. - e. Explain. f. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against this bank? Show this new balance sheet in column 2
Explanation / Answer
When Reserve Ratio is 20%:-
a) Amount of new loans that bank can make:-
Required Reserves:-0.2*100,000=$20,000
Excess Reseves= Actual Reserves-Required Reserves=$22,000-$20,000=$2,000.
Hence amount of new loans that bank can make=$2,000.
b) Increase in money supply by $2,000.
c) Bank's balance sheet
Assets Liabilities
Reseves 22,000 Deposits 102,000
Securities 38,000
Loans 42,000
--------------- -------------
Total 102,000 102,000
When Reserve Ratio is 15%:-
d) Amount of new loans that bank can make
Required Reserves:-0.15*100,000=$15,000
Excess Reseves= Actual Reserves-Required Reserves=$22,000-$15,000=$7,000.
Hence amount of new loans that bank can make=$7,000.
e) Increase in money supply by $7,000.
f) Bank's balance sheet
Assets Liabilities
Reseves 22,000 Deposits 107,000
Securities 38,000
Loans 47,000
--------------- -------------
Total 107,000 107,000
When Reserve Ratio is 25%:-
a)
Required Reserves:-0.25*200=
ExcessReseves= Actual Reserves-Required Reserves=52-50=2
Maximum amount the banking system can lend=100+2=102
b) Balance Sheet after amount has been lent
Assets Liabilities
Reseves 52 Deposits 202
Securities 48
Loans 102
--------------- -------------
Total 202 202
When Reserve Ratio is 20%:-
c )Required Reserves:-0.20*200=40
ExcessReseves= Actual Reserves-Required Reserves=52-40=12
Maximum amount the banking system can lend=100+12=112
d) Balance Sheet after amount has been lent
Assets Liabilities
Reseves 52 Deposits 212
Securities 48
Loans 112
--------------- -------------
Total 212 212
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