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#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
#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%.
- How much will this bank have to hold in reserve? How much does the bank currently hold in excess reserves?
- Suppose the bank lends out the full amount of its excess reserves. Modify the balance sheet to reflect the creation of the loan.
- By how much has the money supply increased as a result of the loan?
- 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.
- Once the cheque has cleared, does the local bank have any excess reserves?
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