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Chapter 15: Q3. (page 319)

Third National Bank has reserves of \(20,000 and checkable deposits of \)100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

Short Answer

Expert verified

The excess reserves of Third National Bank would be $4000.

Step by step solution

01

Calculating excess reserves

Excess Reserves= Actual Reserves-Required Reserves

Therefore, calculate the required reserves and the actual reserves to find the excess reserves. The required reserve is a percentage of the checkable deposits. Therefore, checkable deposits will be equal to the initial checkable deposits plus new checkable deposits.

100000 + 5000 = 105000

The required ratio will be:

105000脳20100=21000

The actual reserves will be the new deposits added to the original reserves. Hence:

20000 + 5000 = 25000

The excess reserves will be = 25000-21000 =$4000.

Therefore, excess reserves will be $4000.

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Most popular questions from this chapter

What is the difference between an asset and a liability on a bank鈥檚 balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank鈥檚 balance sheet?

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Suppose the assets of the Silver Lode Bank are \(100,000 higher than on the previous day and its net worth is up to \)20,000. By how much and in what direction must its liabilities have changed from the day before?

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The following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent.

Assets
Liabilities and Net worth

\((1)(2)
\)(1')(2')
Reserves

Securities

Loans		22,000

38,000

40,000

Checkable deposits
1,00,000


a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1鈥� how the bank鈥檚 balance sheet will appear after the bank has loaned this additional amount.

b. By how much has the money supply changed?

c. How will the bank鈥檚 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鈥�.

d. Answer questions a, b, and c again, on the assumption that the reserve ratio is 15 percent.
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