(a)
To prepare:
The
Answer to Problem 6E
Balance sheet for the First Bank is as represented below:-
| Assets | Amount ($) | Liabilities | Amount($) |
| Cash | Deposits | ||
| Loan | |||
| Total | Total |
Explanation of Solution
Given Information:
Cash reserves are of
An asset includes cash and loan.Summing up the given values:
Also, liabilities for bank includes deposits as they are assets of depositor owned by banks which is
Therefore, the balance sheet would be presented as
| Assets | Amount($) | Liabilities | Amount($) |
| Cash | Deposits | ||
| Loan | |||
| Total | Total |
Here, the total amount of assets is equal to total amount of liabilities.
Balance sheet:
It is a financial record of the company that consists of information about their assets and liabilities. The balance sheet represents that the total liabilities matches the total assets.
Assets of the bank would consists of cash, interest-earning loans, where as liabilities will include debts that needs to be paid by the bank.
(b)
To compute:
The largest loan a bank can make if the bank maintains a reserve requirement of
Answer to Problem 6E
The largest amount of loan that can be made by the bank after maintaining reserve of
Percent is
Explanation of Solution
Given Information:
Cash reserves are of $200,000, loans are of $800,000, and deposits are of $1,000,000.
Reserve requirement is of
Calculate the
Now, the maximum money supply that can be expanded:
Working Note:
To calculate reserve ratio of
It refers to a certain amount of cash from the deposit that bank needs to keep according to the guidelines of central bank.
Required reserve ratio is calculated by
Here, RR is required reserve, r is percentage of required reserve and D is the total amount in deposits.
Excess reserve:
It refers to the amount left after separating the required reserve ratio of the financial institution.
(c)
To compute:
The maximum amount by which the money supply can be increased as result of First Bank's new loan.
Answer to Problem 6E
The maximum amount by which the money supply can be increased as result of F Bank's new loan is
Explanation of Solution
Given Information:
Cash reserves are of $200,000, loans are of $800,000, and deposits are of $1,000,000.
Calculate the excess reserve:-
Therefore, the money supply that can be expanded is
Working Note:
According to the given information, new reserve ratio would be
Required reserve:
It refers to a certain amount of cash from the deposit that bank needs to keep according to the guideline of the central bank.
Required reserve ratio is calculated by
Here, RR is required reserve, r is percentage of required reserve and D is the total amount in deposits.
Excess reserve:
It refers to the amount left after separating the required reserve ratio of the financial institution.
(d)
To compute:
The largest loan and increase in money supply by the bank, If the reserve requirement is reduced to 12 percent.
Answer to Problem 6E
The money supply that can be expanded is equal to
Explanation of Solution
Given Information:
Cash reserves are of $200,000, loans are of $800,000, and deposits are of $1,000,000.
Calculate the excess reserve:-
Therefore, the increase in amount of the money supply is
Working Note:
According to the given information,new reserve ratio would be
Introduction:
Required reserve:
It refers to a certain amount of cash from the deposit that bank need to keep according to the guideline of central bank.
Required reserve ratio is calculated by
Here, RR is reserve ratio, r is percentage of required reserve and D is the total amount in deposits.
Excess reserve:
It refers to the amount left after separating the required reserve ratio of the financial institution.
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