Chapter 35, Problem 5P

Subpart (a):

To determine

Balance sheet.

Explanation of Solution

The required reserves are evaluated as follows:

$\begin{array}{l}\text{Required Reserves}=\text{Required Reserve Ratio}\times \text{Checkable deposits}\\ =0.20\times \$100,000\\ =\text{\$20,000}\end{array}$

The excess reserves are evaluated as follows:

$\begin{array}{l}\text{Excess Reserve}=\text{Actual Reserves-Required Reserves}\\ =\text{\$22,000-\$20,000}\\ =\text{\$2000}\end{array}$

$2,000 is the excess reserve, so the increase in loans is $2,000. Initially, securities and reserves do not change. The people who have borrowed money will have the same amount that will be credited to his or her account for the loan taken, once the loan is made by the bank. So, there will be a rise in checkable deposits for $2,000. Hence, $2000 is the utmost amount of loans that can be made by Big Bucks Bank

Table -1 illustrates the balance sheet of the bank after lending extra money.

Table -1

Assets			Liabilities and net worth
		(1)			(1)
Reserves	$22,000	$22,000	Checkable Deposits	$100,000	$102,000
Securities	38,000	38,000
Loans	40,000	42,000

Economics Concept Introduction

Concept Introduction:

Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.

Subpart (b):

To determine

Rise in money supply.

Explanation of Solution

There is a rise of $2,000 in checkable deposits. A monetary multiplier is not considered till now, so transaction has an immediate effect which is a $2,000 rise in the supply of money.

Subpart (c):

To determine

Balance sheet.

Explanation of Solution

Table -2 illustrates the new balance sheet.

Table -2

Assets						Liabilities and  net worth
			(1)							(1)	(2)
Reserves		$22,00		$22,000	$20,000	Checkable deposits		$100,000	$102,000		$100,000
Securities		38,000		38,000	38,000
Loans		40,000		42,000	42,000

Once the checks against the loan are drawn, there will be a fall of $2,000 in checkable deposits. Once these checks are cleared, the reserves go down by $2,000.

Economics Concept Introduction

Concept Introduction:

Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.

Subpart (d):

To determine

Balance sheet.

Explanation of Solution

On the basis of sub part (a), the required reserves are evaluated as follows:

$\begin{array}{l}\text{Required Reserves}=\text{Required Reserve Ratio}\times \text{Checkable deposits}\\ =\text{0}\text{.15}\times \text{\$100,000}\\ =\$15,000\end{array}$

Hence, the required reserves are $15,000.

Excess Reserves are evaluated as follows:

$\begin{array}{l}\text{Excess Reserves}=\text{Actual Reserves-Required Reserves}\\ =\text{\$22,000-\$15,000}\\ =\text{\$7,000}\end{array}$

Hence, the excess reserves are $7,000.

$7,000 is the excess reserve, so the increase in loans is $7,000. Initially, securities and reserves do not change. The people who have borrowed money will have the same amount that will be credited to his or her account for the loan taken once the loan is made by the bank. So, there will be a rise in checkable deposits for $7,000.

Table -3 shows the bank’s balance sheet will appear after the bank has lent this additional amount and is obtained from the given diagram.

Table-3

Assets			Liabilities and net worth
		(1)			(1)
Reserves	$22,000	$22,000	Checkable Deposits	$100,000	$107,000
Securities	38,000	38,000
Loans	40,000	47,000

On the basis of sub part (b), there is a rise of $7,000 in checkable deposits. Monetary multiplier is not considered till now, so the transaction has an immediate effect which is a $7,000 rise in supply of money.

On the basis of sub part (c), once the checks against the loan are drawn, there will be a fall of $7,000 in checkable deposits. Once these checks are cleared, the reserves go down by $7,000.

Table -4 shows the new balance sheet that is illustrated below.

Table -4

Assets						Liabilities and  net worth
			(1)							(1)	(2)
Reserves		$22,00		$22,000	$20,000	Checkable deposits		$100,000	$107,000		$100,000
Securities		38,000		38,000	38,000
Loans		40,000		47,000	47,000

Economics Concept Introduction

Concept Introduction:

Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.