Question

In: Economics

Assets- reserves: 75000 loans : 430000 liabilities : deposites : 500000 net worth : 5000 a)...

Assets- reserves: 75000 loans : 430000

liabilities : deposites : 500000 net worth : 5000

a) Suppose that a bank has the following balance sheet and you deposit $5000 in currency into your cheque account at such bank. Use a T-account to show the initial impact of this transaction on the bank’s balance sheet. What is the impact of this transaction on M1?

(b) If the bank holds a reserve ratio of 0.1, what is the maximum amount the bank can loan out. Suppose that the bank intends to loan out the maximum amount it can. Show the impact of the loan on the balance sheet.

Solutions

Expert Solution

Here, given that assets (Debit side) include: Reserves- 57000 and loans- 430,000

And, Liabilities (credit side) include: Deposits- 500,000 and net worth- 5,000

a) If a person deposit $5000 in currency into his cheque account, it will increase the total deposits as well as the total reserves of the bank with the same amount, and the effect of this transaction in the balance sheet is given below:

Assets

Liabilities

Reserves -    80,000

Loans -    430,000

Deposits-    505,000

Net worth -    5,000

M1 is the primary and a narrow concept of money supply that only include the physical money such as currency in circulation, demand deposit, cheque accounts, traveler’s check and other checking accounts.

Deposit of $5,000 will increase the amount in cheque account and at the same time is decrease the currency in circulation with the same amount. Therefore, there the value of M1 money supply will be unchanged.

b) It is given that the bank holds reserve ratio of 0.1 therefore, bank has to maintain the 10 percent of total deposit as required reserve and the rest of the deposit, that are considered as excess reserves, can be loaned out.

Here, total deposits are $505,000. Therefore, the required reserve would be:

And the excess reserves would be:

Therefore, the bank can loan out $29,500.

Hence, the impact of this loan on balance sheet would be:

Assets

Liabilities

Reserves-   50,500

Loans -    459,500

Deposits-       505,000

Net worth-     5,000

=Total depositxreserve ratio 10 =$505,000 x 100 = $50,500

=Total reserve- required reserve =$80,000-$50,500 = $29,500


Related Solutions

Assets:  $200 Reserves; $5000 Short term Bonds; $6000 Long Term Loans Liabilities: $7000 Checkable Deposits; $3000 Fixed...
Assets:  $200 Reserves; $5000 Short term Bonds; $6000 Long Term Loans Liabilities: $7000 Checkable Deposits; $3000 Fixed Rate Borrowings; $1200 Capital What is the equity multiplier for this bank? Why would a bank want to increase its EM? Why would a bank decrease its EM?
. The Balance sheet reveals the firm's assets, liabilities and owners' equity (net worth). But the...
. The Balance sheet reveals the firm's assets, liabilities and owners' equity (net worth). But the cash position of the company also forms a very prominent position in order to know the liquidity of the company. The balance sheet items (in OMR) are taken from Magrib Ltd. for the years 2018 and 2019 respectively: 2018 2019 Assets Furniture, Equipment and buildings       100,060                   81,040 Current Assets Inventory         29,300                   14,480 Sundry debtors         12,750                   15,870 Bank        ...
What are assets, liabilities, and new worth/net assets and Do GAAP have a preference between cash...
What are assets, liabilities, and new worth/net assets and Do GAAP have a preference between cash and accrual bases of accounting? Explain.
The Bank of Springfield has total reserves of $300, loans of $500 and on the liabilities...
The Bank of Springfield has total reserves of $300, loans of $500 and on the liabilities side demand deposits of $1,000.If the customers write checks for $200 and the required reserve ratio is 20%, then its required reserves fall to?
Tyler Savings Banks has the following balance sheet. Assets Liabilities Reserves 80 Deposits 400 Loans 420...
Tyler Savings Banks has the following balance sheet. Assets Liabilities Reserves 80 Deposits 400 Loans 420 Capital 100 Total 500 Total 500 If the bank suffers a deposit outflow of $50 with a required reserve ratio on deposits of 10%, what action can be taken? Show, using a revised balance sheet. Explain Assets                 Liabilities
First National bank with Assets(Reserves: 20, Loans: 80), Liabilities(Deposits: 90, Share Capital: 10) Require reserve ratio...
First National bank with Assets(Reserves: 20, Loans: 80), Liabilities(Deposits: 90, Share Capital: 10) Require reserve ratio by the Fed is 10% If the bank experiences a deposit outflow of 15mn a. what is the new level of deposits? b. what is the new level of reserves? c. what is the resulting reserve ratio? d. if ratio is less than 10%, what would bank do for bringing more reserves?
Reference Needed. 200 word if possible. Discuss sources of healthcare revenue, assets, liabilities, and net worth....
Reference Needed. 200 word if possible. Discuss sources of healthcare revenue, assets, liabilities, and net worth. Reference Needed. 200 word if possible.
Use the following items to determine the total assets, total liabilities, net worth, total cash inflows,...
Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. Rent for the month $ 1,450 Monthly take-home salary $ 2,985 Spending for food $ 745 Cash in checking account $ 610 Savings account balance $ 2,050 Balance of educational loan $ 3,120 Current value of automobile $ 9,500 Telephone bill paid for month $ 145 Credit card balance $ 315 Loan payment $ 240 Auto insurance $ 390 Household...
we assumed that banks hold only reserves and loans as assets for simplicity. Now suppose that...
we assumed that banks hold only reserves and loans as assets for simplicity. Now suppose that banks use x fraction of their deposits to buy treasuries. Derive the money multiplier as a function of x, currency-deposit ratio cdr, and actual reserve ratio ar. How does an increase in x affect money multiplier, monetary base, and money supply?
Consider a bank that has the following assets and liabilities: Loans of $100 million with a...
Consider a bank that has the following assets and liabilities: Loans of $100 million with a realized rate of 5% Security holdings of $50 million earning 10% interest income Reserves of $10 million Savings accounts of $100 million interest of 2.5% Checking deposits of $30 million which pay no interest Determine the profits for this bank. (Hint: The bank earns income, or revenues, not only from its loans but also from any securities it holds!)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT