Question

Bank XYZ Balance Sheet ASSETS LIABILITIES Total reserves      ​ $3 comma 800 comma 000 Checkable deposits ​$4 comma 000 comma 000 Required reserves ​$800 comma 000 Excess reserves ​$3 comma 000 comma 000 Loans   ​ $200 comma 000 The required reserve ratio is 0.20. If the Federal Reserve buys​ $1,000,000 worth of bonds from a bond dealer who has her account at Bank XYZ above and she deposits the entire​ $1,000,000 into a checking account at Bank​ XYZ, what will be the new required and excess reserves for this bank​ (assume no new loans are​ made)? (Remember that required reserves are found by applying the required reserve ratio to the amount of total checkable​ deposits.) Total checkable deposits at Bank XYZ grow by ​$ ▼ 1000000 800000 200000 because of this deposit from the broker.Bank XYZ is now required to hold an additional ​$ ▼ 1000000 800000 200000 as required reserves due to this​ $1,000,000 deposit into a checking account.and can now lend an additional ​$ ▼ 1000000 800000 200000 due to this​ $1,000,000 deposit into a checking account. Fill in the blanks in the table below to complete the​ T-account of Bank XYZ from the new​ $1,000,000 deposit in to a checking account. ASSETS LIABILITIES Total reserves ​$ nothing Checkable deposits ​$ nothing Required reserves ​$ nothing Excess reserves ​$ nothing Loans ​$200 comma 000  

Answer 1

Federal Reserve buys $1,000,000 worth of bonds from a bond dealer.

She has deposited this amount in her account.

So, bank will have new deposit of $1,000,000.

Required reserve ratio = 0.20

Required reserves created = New deposit * Required reserve ratio = $1,000,000 * 0.20 = $200,000

The required reserves created by new deposit is $200,000.

Excess reserves created = New deposit - required reserves created = $1,000,000 - $200,000 = $800,000

The excess reserve created by new deposit is $800,000.

This excess reserves can be utilized by bank to make additional loans.

So,

Total checkable deposits at Bank XYZ grows by $1,000,000 because of this deposit from the broker.

Bank XYZ is now required to hold an additional $200,000 as required reserves due to this $1,000,000 deposit into a checking account and can now lend an additional $800,000 due to this $1,000,000 deposit into a checking account.

Following is the required balance sheet -

Assets	Amount	Liabilities	Amount
Total reserves	$4,800,000	Checkable deposits	$5,000,000
Required reserves - $1,000,000
Excess reserves - $3,800,000
Loans	$200,000