#1 A simplified balance sheet for the local bank is shown below. All figures are in thousands.

Assets

Liabilities and net worth

Reserves

$1200

Demand deposits

$5000

Securities

$750

Capital Stock

$1000

Loans

$3500

Property

$550

The desired reserve ratio is 20%.

1. How much will this bank have to hold in reserve? How much does the bank currently hold in excess reserves?

1. Suppose the bank lends out the full amount of its excess reserves. Modify the balance sheet to reflect the creation of the loan.

1. By how much has the money supply increased as a result of the loan?

1. Suppose the borrower of the new loan writes a cheque for the amount of the loan to purchase new equipment for her business. The equipment seller then deposits the cheque in an out-of-town bank. Show the new balance sheet for this local bank once the cheque has cleared.

1. Once the cheque has cleared, does the local bank have any excess reserves?