Fill This Form To Receive Instant Help
Homework answers / question archive / Suppose that a bank faces a balance sheet illustrated below, and the required reserve ratio is 20%
Suppose that a bank faces a balance sheet illustrated below, and the required reserve ratio is 20%.
ASSETS LIABILITIES
Reserves $50,000 Deposits $100,000
Loans $50,000
Total $100,000 Total $100,000
A. How much more could this bank loan out without acquiring additional funds?
B. Starting with the balance sheet above, suppose that a large depositor withdraws $50,000. With what action might the bank respond to this withdrawal, assuming other depositors are not available.
C. Draw a new balance sheet reflecting the end result after the changes explained in part B.
A. How much more could this bank loan out without acquiring additional funds?
As the required reserve ratio is 20% and that the Reserves in the balance sheet is $50,000, we can find the total amount of bank loan as follows:-
50,000/20% = $250,000
Since the bank has already loan out $50,000, then the bank can loan an additional of $200,000 without acquiring additional funds.
B. Starting with the balance sheet above, suppose that a large depositor withdraws $50,000. With what action might the bank respond to this withdrawal, assuming other depositors are not available.
If a large depositor withdraws $50,000 from the bank, then the liabilities side will be reduced from $100,000 to $50,000. The bank will need to adjust the asset side by reducing its reserves and loans. Since the required reserve ratio for the loan is 20%, the new reserves should be equal to 20% of the new amount of loan.
We will let X be equal to loan, and 0.2X be the new reserves. Then, we will solve for X as follows: -
X + 0.2X = 50,000
1.2X = 50,000
X = 41,667
Therefore, the new amount of loan is equal to 41,667. The reserves will be equal to 8,333.
C. Draw a new balance sheet reflecting the end result after the changes explained in part B.
ASSETS LIABILITIES
Reserves $ 8,333 Deposits $50,000
Loans $41,667
Total $50,000 Total $50,000