Question
(Please show your work using T accounts). A bank has $90 million in deposits and $10 million of equity outstanding. It has $10 million of
(Please show your work using T accounts). A bank has $90 million in deposits and $10 million of equity outstanding. It has $10 million of reserves with the Fed, owns $20 million in government bonds, and owns $70 million in home mortgages. It has a reserve requirement of 10%.
a. The bank experiences a deposit outflow of $5 million. What happens to its reserves?
b. What is the minimum amount by which the bank must increase its reserves (above the level in part (a)) with the Fed in response to the deposit outflow?
c. Name two ways in which the bank can accomplish the necessary increase in reserves.
d. Now suppose that, instead of an outflow, the bank experiences a deposit inflow of $20 million. What is the minimum amount by which the bank must increase its reserves with the Fed (above $10 million) in response to the deposit inflow?
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