Question

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Paolo, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank.
a. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).

Assets Liabilities

b. Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

(Dollars) (Dollars) (Dollars)
750,000

Answer 1

Answer and Explanation:

a. The completion of the following table to reflect any changes in First Main Street Bank's T-account is shown below:-

First Main Street Bank's Balance Sheet

Assets           Amount          Liabilities                         Amount

Reserves     $750,000      Checkable Deposits       $750,000

b. The completion of the following table to show the effect of a new deposit on excess and required reserves is shown below:-

Amount deposited      Change in excess  Change in required

                                            reserves                     reserves

$750,000                            $600,000                    $150,000

                                  ($750,000 - $150,000)     ($750,000 × 20%)