## Critical Analysis Q17Suppose that the reserve requirement is 10% and the following table shows the balance sheet of the People’s National Bank.### Balance Sheet| **Assets** | **Liabilities** ||------------------|-----------------------|| Vault Cash $30,000 | Checking Deposits $300,000 || Deposits at Fed $45,000 | Net Worth $20,000 || Securities $45,000 | || Loans $200,000 | |### AnalysisThe required reserves of People’s National Bank are **__________**, while the excess reserves are **__________**. Thus, if this bank wanted to extend a loan, the maximum amount for this additional loan would be **__________**. Assuming the bank extends this loan, the total amount of loans in the bank’s balance sheet would be **__________**.Suppose the reserve requirement increases to 20%.The bank would only be in a position to extend additional loans amounting to **__________**.

Reserve requirement refers to the amount of money that a commercial bank needs to keep with them to make uncertain transactions in the near future.According to the above balance sheet, a bank has checkable deposits of $300,000 in which it has to maintain a reserve of 10%. There the required reserve of the bank would be: =Checkable deposit×Reserve requirement Rate=$300,000×10100=$30,000 Total reserves by the bank are calculated by adding Vault cash and Deposits at Fed. Therefore excess reserve would be: =Total reserve-reserve requirement=$30,000+$45,000-$30,000=$45,000 The Additional loan can be made using a excess reserve of the bank, and its multiplier effect provides the amount that a people’s national bank can loan out maximum. Therefore, the maximum amount of additional loan would be: =Excess Reservereserve requirement rate=$45,000.10=$450,000 This additional loan will be recorded in the asset side of the Bank balance as it increases loan and that further increases checkable deposit in the liability side by the same amount, that is $450,000. If the reserve requirement is 20%, it can extend the additional loan by a lower amount as the bank has to keep $60,000 at banks and has $15,000 as an excess reserve to loan out. As a result, the additional loan is amounted to: =Excess Reservereserve requirement rate=$15,000.20=$75,000

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Suppose that the reserve requirement is 10% and the following table shows the balance sheet of the People's National Bank. Assets Liabilities Vault Cash $30,000 Checking Deposits $300,000 Deposits at Fed $45,000 Net Worth $20,000 Securities $45,000 Loans $200,000 |. Thus, if this bank wanted to . Assuming the bank extends this loan, the total amount of The required reserves of People's National Bank are s while the excess reserves are s extend a loan, the maximum amount for this additional loan would be s loans in the bank's balance sheet would be s Suppose the reserve requirement increases to 20%. The bank would only be in a position to extend additional loans amounting to s

Suppose that the reserve requirement is 10% and the following table shows the balance sheet of the People's National Bank. Assets Liabilities Vault Cash $30,000 Checking Deposits $300,000 Deposits at Fed $45,000 Net Worth $20,000 Securities $45,000 Loans $200,000 |. Thus, if this bank wanted to . Assuming the bank extends this loan, the total amount of The required reserves of People's National Bank are s while the excess reserves are s extend a loan, the maximum amount for this additional loan would be s loans in the bank's balance sheet would be s Suppose the reserve requirement increases to 20%. The bank would only be in a position to extend additional loans amounting to s

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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