Suppose First National Bank begins business with the following balance sheet. The required

reserve ratio is 10%.

Assets ($ millions) Liabilities ($ millions)

Cash in Vault 100 Checkable Deposits 90

Bank Capital 10

1. Suppose the bank makes 40 in commercial loans and buys 40 in securities. Update the

balance sheet, categorizing the assets as required reserves, excess reserves, securities

and loans.

2. Using the t-accounts for the First National Bank and the Second National Bank, describe

what happens when jane brown writes a 15 check on her account at the first national

bank to pay her friend Joe Green, who in turn deposits the check in his account at the

Second National bank.

3. Update the Balance sheet of First National Bank.

4. What is the resulting shortfall in reserves?