Assume that banks aim to hold no excess reserves. The AAA bank responds to the change...

Assume that banks aim to hold no excess reserves. The AAA bank responds to the change in its reserve position in part (b) by maximizing its loan portfolio. Under this assumption, show AAA’s T-Account after it has fully adjusted to the change in its reserve position. Explain what actions occurred that caused the balance sheet to change

Solutions

Expert Solution

Since the bank aims to hold no excess reserves, it means that it will loan out all of its excess reserves. In that case, its balance sheet will change like below-

It will keep 5% of the new deposits as reserves, as required. The rest of the 950 it will loan out.

Rahul Sunny answered 2 years ago

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