Suppose that a bank faces a balance sheet illustrated below, and the required reserve ratio is 20%

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