(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.
Want to see more full solutions like this?
- Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?arrow_forwardQuestion 26 A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20%. It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank. The first bak will find its reserves decrease by: $3,000 $2,000 $1,600 $8,000 Next Page Page 26 of 35arrow_forwardLast Bank of Panorama Springs Assets: Liabilities: Reserves $25.00 Deposits $175.00 Loans $150.00 If the reserve requirement is 12 percent, what is the state of this bank? a. It has excess reserves of more than $5000. b. It has excess reserves of less than $5000. c. It has less reserves than required. d. It can make a new loan of $17,500.arrow_forward
- BALANCE SHEET OF BANK A (S IN MILLIONS) ASSETS LIABILITIES and NET WORTH Reserves (Cash/Reserves at Fed) 550 Demand Deposits $100 Losns 20 Govt. Securities 90 Net Worth (Owners' Equity) What is the net worth of this bank? 2. If the required reserve is 10%, what is the amount of REQUIRED RESERVES that this bank must bold? 3. What then is the mount of EXCESS RESERVES that this bank is now holding? How much does this bank have available for NEW LOANS? 5. If the required reserve is increased to 20%, whal is the amount of REQUIRED RESERVES that this bank must bold?arrow_forwardTable 1 shows the financial position of the Smithville Bank once $4441.00 has been deposited. Assume that the required reserve ratio is 7.00%. Table 1. Original Assets and Liabilities The bank manager decides to lend Billy Bob Smith all of Assets Liabilities the bank's excess reserves. Billy Bob takes the funds to Eula Mae's Used Machines and buys a pickup truck. Eula reserves: $4441.00 deposits: $4441.00 Mae then deposits the money in her account back at the Smithville Bank. Table 2. Assets and Liabilities After Bank Makes a Loan Table 2 should show the bank's accounts after the loan is made and the funds again deposited. Round all answers to Assets Liabilities the nearest cent. reserves: ? deposits: ? loans: ? What are the bank's loans in Table 2? What are the bank's reserves in Table 2? What are the bank's deposits in Table 2? %24 %24 %24arrow_forward11arrow_forward
- Table 29-3 The First Bank of Roswell Assets Liabilities Reserves $30,000 Deposits $200,000 Loans 170,000 Refer to Table 29-5. Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation as depicted by the T-account, a customer deposits an additional $60,000 into his account at the bank. If the bank takes no other action it will a. be unable to make any new loans. b. be in a position to make new loans equal to a maximum of $6,000. c. have $4,000 in excess reserves. d. have $64,000 in excess reserves.arrow_forwardA bank has outstanding loans of $7,500, reserves of $2,500, and deposit liabilities of $10,000. If the required reserve ratio is 10%, this bank: A. Is holding excess reserves of $1,000 B. Is in a position to make a new loan for $1,500 C. Is in a position to make a new loan for $2,500 D. Has less reserves than requiredarrow_forwardAssets Liabilities and Equity Reserves $5,000 Demand deposits $20,000 Business loans $10,000 Student loans $8,000 Government securities $2,000 Equity (Net worth) $5,000 Total assets $25,000 Total liabilities and equity $25,000 The following is a balance sheet for Smith Bank. Assume a 10% reserve requirement. A. Calculate a 10% reserve requirement B. Calculate the maximum amount of additional loans that Smith Bank can make without selling its holdings of government securities. C. Assuming that Smith Bank and other banks now lend out all excess reserves, calculate the maximum possible change in the following: i. Demand deposits throughout the banking system ii. Total reserves throughout the banking system D. Suppose that the country's central bank purchases $1,000 of Smith Bank's holdings of government securities as part of its open market operations. Do…arrow_forward
- Use the following balance sheet for the following bank in answering questions 18 and 19. Assume the required reserve ratio is 20%. Assets $ 27,000 Liabilities and net worth Checkable deposits Capital stock S110,000 200,000 Reserves Loans 50,000 33,000 200,000 Securities Property 18. Refer to the above data. This bank can safely expand its loans by a maximum of: * $5,000. $25,000. $12,000. $7,000arrow_forwardIf banks require 10% of transaction deposit in reserve, How much is the required reserve? How much is the excess reserve?arrow_forwardWhich statement about banks and risk is not correct? Select one: a. Banks face liquidity risks from lending activities. This is because the bank's assets are tied up in short- term loans whilst bank liabilities are longer-term b. Banks face credit risks from lending activities. To reduce this risk, banks require that potential borrowers put up some of their own funds or assets to serve as collateral C. Banks create bank money through their lending activities. The amount of bank money in an economy exceeds the amount of base money issued by the central bank creating liquidity risk for the bankarrow_forward
Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStax
