Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is

Question:

Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent:

a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount.

b. By how much has the supply of money changed? Explain.

c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in column 2.

d. Answer questions a, b, and c on the assumption that the reserve ratio is 15 percent.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...