A bank has reserves of $34.3 million, securities of $65.2 million, and loans of $287.5 million. It has transaction accounts totaling $357.7 million and capital of $29.3 million. The reserve requirement is 0 percent on the first $7 million of transaction accounts, 3 percent on transaction accounts from $7 million to $47 million, and 10 percent on transaction accounts above $47 million.
a.Draw up the bank's balance sheet and calculate the bank's excess reserves. b.Suppose the bank makes a loan equal to the amount of its excess reserves that you calculated in part a. Draw up the bank's balance sheet before the customer spends the proceeds of the loan. What are the bank's excess reserves? c.Now suppose the customer spends the proceeds of the loan. Draw up the bank's balance sheet and calculate its excess reserves.
What will be an ideal response?
| a. |  |
| Required reserves = [0.03 × (47 ? 7)] + [0.10 × (357.7 ? 47)] = 1.2 + 31.07 = 32.27 | |
| Excess reserves = reserves ? required reserves = 34.3 ? 32.27 = 2.03 | |
| b. | Loan of $2.03 million:
|
| Required reserves = [0.03 × (47 ? 7)] + [0.10 × (359.73 ? 47)] = 1.2 + 31.273 = 32.473 | |
| Excess reserves = reserves ? required reserves = 34.3 ? 32.473 = 1.827 | |
| c. | Company spends $2.03 million:
|
| Required reserves = [0.03 × (47 ? 7)] + [0.10 × (357.7 ? 47)] = 1.2 + 31.07 = 32.27 | |
| Excess reserves = reserves ? required reserves = 32.27 ? 32.27 = 0 |
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