Question

Suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. the required reserve ratio is 20%. the federal reserve buys a government bond worth $1,500,000 from hubert, a client of first main street bank. he deposits the money into his checking account at first main street bank.

Answer 1

Complete Question:

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Hubert, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank.

Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).

Answer:

Dr Assets Reserves $1,500,000

Cr Liabilities Deposits $1,500,000

Explanation:

When the bank borrowed $1.5 million, it increased its cash reserves and the liability with the same amount. The increase in the assets side of T-account was $1,500,000 which increased the bank reserves and the increase in the liability side of the T-account was also $1,500,000 which increased the demand deposits.

The addition of reserves means that the bank can make loans to borrowers and earn interest on it. Likewise, the demand deposit can be withdrawn if Hubert wants to withdraw the amount because the bank is the borrower.

The double entry would be as under:

Dr Assets Reserves $1,500,000

Cr Liabilities Deposits $1,500,000