Question

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 10 percent.

Instructions: Enter your answers as whole numbers.

a. What is the maximum amount of new loans that Big Bucks Bank can make?      $  .    

Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount.

Assets					Liabilities and net worth
		(1)	(2)				(1' )	(2' )
Reserves	$23,000	$	$		Checkable deposits	$100,000	$	$
Securities	38,000
Loans	39,000

b. By how much has the supply of money changed?      $  .

c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'.

d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 5 percent. What is the maximum amount of new loans that this bank can make?      $  .     

Show in columns 3 and 3' (below) how the bank’s balance sheet will appear after the bank has lent this additional amount.     

By how much has the supply of money changed?      $  .

Assets					Liabilities and net worth
		(3)	(4)				(3' )	(4' )
Reserves	$23,000	$	$		Checkable deposits	$100,000	$	$
Securities	38,000
Loans	39,000

    How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.

Answer 1

Solution:-

A). Required reserves = Reserve ratio * Checkable deposits.

                                          = 0.10 * 100000

                                          = $ 10,000.

Excess reserves = Actual reserves - Required reserves.

                               = 23000 - 10000

                               = $ 13000.

Excess reserves represent the maximum amount of loans made by the Big Bucks Bank.

The maximum amount of loans made by the Big Bucks Bank = $13000.

Assets	(1)	(2)	Liabilities	(1)	(2)
Reserve = $23,000	$23,000	$10,000	Checkable = $100,000	$113,000	$100,000
Securities = $38,000	$38,000	$38,000	deposits
Loans = $39,000	$52,000	$52,000
Total	$113,000	$100,000		$113,000	$100,000

(i) Loans = 39000 + 13000 = $ 52000.

b). answer: - Money supply will increase by $ 13000.

c). answer: - Checkable deposits will decrease by $ 13000 and Reserves will decrease by $13000.

(D). Required reserves = Reserve ratio * Checkable deposits.

                                          = 0.05 * 100000

                                          = $ 5,000.

Excess reserves = Actual reserves - Required reserves.

                               = 23000 - 5000

                               = $ 18000.

Excess reserves represent the maximum amount of loans made by the Big Bucks Bank.

The maximum amount of loans made by the Big Bucks Bank = $18000.

Assets	(1)	(2)	Liabilities	(1)	(2)
Reserve = $23,000	$23,000	$5,000	Checkable = $100,000	$118,000	$100,000
Securities = $38,000	$38,000	$38,000	deposits
Loans = $39,000	$57,000	$57,000
Total	$118,000	$100,000		$118,000	$100,000

(i) Loans = 39000 + 18000 = $ 57000.

(ii). answer: - Money supply will increase by $ 18000.

(iii). answer: - Checkable deposits will decrease by $ 18000 and Reserves will decrease by $18000.