Bank Balance Sheets Assignment. 1.The maximum possible loan is $5000. Required reserves =.1 x $150,000 = $15,000 (reserve requirement x demand deposits)

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Presentation transcript:

Bank Balance Sheets Assignment

1.The maximum possible loan is $5000. Required reserves =.1 x $150,000 = $15,000 (reserve requirement x demand deposits) Actual reserves = $20,000 Excess reserves = $20,000 - $15,000 = $5000 If banks continue to make the maximum possible loan, the maximum amount of new deposits will be $5000 (first loan) x 10 (monetary multiplier = 1/.10) = $50,000

Loan is made. Check clears bank. Lloyd Braun deposits $20,000. Assets Reserves -- $35,000 Securities -- $35,000 Property -- $180,000 Loans -- $120,000 Liabilities Demand Deposits -- $170,000 Net Worth -- $200,000 When the loan check clears the bank, reserves fall by $5000 and loans increase by $5000. When Braun deposits his check, deposits and reserves increase by $20,000. Notice that Assets = Liabilities. Required reserves are now $17,000 ($170,000 x.1) so excess reserves are $18,000 ($35,000 - $17,000). The maximum possible loan is $18,000.

Loan is made. Check clears bank. Assets Reserves -- + $18,000 Liabilities Demand Deposits -- + $18,000 Reserves and Demand Deposits both increase by $18,000. If this bank had no excess reserves, the bank must keep $1800 in required reserves ($18,000 x.1). Excess reserves are $16,200 ($18,000 - $1800) so… The maximum possible loan is $16,200.

If banks continue to lend out all they can, the maximum amount of new deposits will be $180,000 (first loan ($18,000) x monetary multiplier (10)). The addition to reserves will be $20,000 (first deposit OR first addition to required reserves ($2000) x monetary multiplier (10)). The maximum increase in the money supply will be $180,000 because all the “new deposits” are created. They did not exist before.