Question

Table 1

Assets	Liabilities
Reserves               $400	Demand deposits       $1000
Gov. securities     $300	Other liabilities           $200
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1500	Total liabilities         $1500

Part IV. A hypothetical balance is shown for a commercial bank in Table I. Assume the reserve requirement is initially 20 percent.

Use t-accounts to show how this balance sheet would appear after the following transactions? With each t-account calculate the amount of excess reserves after the transaction. Consider each transaction to be independent by returning to the original situation. Do not make the transactions cumulative.

a. The bank purchases a $100 government bond.                            Actual_____­­­­_ Excess______

b. A customer deposits $100 in a checking account                        Actual____­­­­­­­­__­ Excess______

c. The bank makes a $100 loan to a customer.                                Actual_______Excess__­­­­­____

d. A customer writes a check for $100 to pay a debt to another bank.    Actual____ Excess____                                   

e. The bank borrows $100 from the Federal Reserve.                     Actual_____Excess_____

f. The Federal Reserve raises the reserve ratio to 25%.                        Actual_____   Excess_____

PLEASE ANSWER ALL QUESTIONS

Answer 1

Solution

Required reserves = Required reserve ratio X Demand deposit

a. The bank purchases a $100 government bond.

T account after above transaction will be:

Government securities + $ 100; Reserve -$ 100

Assets	Liabilities
Reserves               $300	Demand deposits       $1000
Gov. securities     $400	Other liabilities           $200
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1500	Total liabilities         $1500

Actual Reserve = $ 400

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 300 - (20 % X $ 1000)

                            =$ 300-$ 200

                            = $ 100

b. A customer deposits $100 in a checking account    

T account after above transaction will be:

Demand deposits + $ 100; Reserve + $ 100

Assets	Liabilities
Reserves               $500	Demand deposits       $1100
Gov. securities     $300	Other liabilities           $200
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1600	Total liabilities         $1600

Actual Reserve = $ 500

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 500 - (20 % X $ 1100)

                            = $ 500 - $ 220

                            = $ 280

c. The bank makes a $100 loan to a customer.

T account after above transaction will be:

Loan + $ 100 ; Reserve -$ 100

Assets	Liabilities
Reserves               $300	Demand deposits       $1000
Gov. securities     $300	Other liabilities           $200
Loans                   $600	Owners equity            $300
Other                   $300
Total assets      $1500	Total liabilities         $1500

Actual Reserve = $ 300

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 300 - (20 % X $ 1000)

                            =$ 300-$ 200

                            = $ 100

d. A customer writes a check for $100 to pay a debt to another bank.

T account after above transaction will be:

Demand deposits - $ 100 ; Reserve -$ 100

Assets	Liabilities
Reserves               $300	Demand deposits       $900
Gov. securities     $300	Other liabilities           $200
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1400	Total liabilities         $1400

Actual Reserve = $ 300

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 300 – (20 % X $ 900)

                            = $ 300 - $ 180

                            = $ 120

e. The bank borrows $100 from the Federal Reserve.

T account after above transaction will be:

Other Liabilities + $ 100 ; Reserve + $ 100

Assets	Liabilities
Reserves               $500	Demand deposits       $1000
Gov. securities     $300	Other liabilities           $300
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1500	Total liabilities         $1500

Actual Reserve = $ 500

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 300 – (20 % X $ 1000)

                            = $ 500 - $ 200

                            = $ 300

f. The Federal Reserve raises the reserve ratio to 25%.

T account after above transaction will be: Not impact.

Only required reserves amount will change

Assets	Liabilities
Reserves               $400	Demand deposits       $1000
Gov. securities     $300	Other liabilities           $200
Loans                   $500	Owners equity            $300
Other                   $300
Total assets      $1500	Total liabilities         $1500

Actual Reserve = $ 400

Excess Reserves = Actual Reserves - Required Reserves

                            = $ 400 – (25 % X $ 1000)

                            = $ 400 - $ 250

                            = $ 150