Question
2. The bank you own has the following balance sheet (M = millions): ASSETS | LIABILITIES + BANK CAPITAL -------------------------------------------| -------------------------------------------------- Reserves $75 M |
2. The bank you own has the following balance sheet (M = millions): ASSETS | LIABILITIES + BANK CAPITAL -------------------------------------------| -------------------------------------------------- Reserves $75 M | Checking deposits $500 M Loans $525 M | Bank capital $100 M ------------------------------------------ | -------------------------------------------------- Total assets $600 M | Total liabilities & bank capital $600 M a. If the required reserve ratio (RRR) is 10% of checking deposits, then what are the banks excess reserves?
b. If RRR = 10% of checking deposits and the bank suffers a deposit outflow of $50 million, what will the banks excess reserves be (give a number), and why is that a problem? (Hint to get you started: The loss of $50 million in deposits also means a loss of $50 million in reserves.)
c. What actions can the bank take to solve this problem?
d. If the value of the banks loans falls by 20%, what particular problem will the bank have? What can it do to try to solve that problem?
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