Answer:
1. See part 1 of the attached excel file for the T-account.
2. See part 2 of the attached excel file for the T-account.
3. Because BSB is cutting back on its loans, other banks will find they have <u>lower</u> reserves, causing them to <u>reduce</u> their loans. Which of the following ways represent an alternative for BSB to return to its original reserve ratio? Check all that apply.
4. The correct options are b. Borrow money from another bank and d. Attract additional deposits.
Explanation:
1. Beleaguered State Bank (BSB) holds $500 million in deposits and maintains a reserve ratio of 20 percent. Complete the following T-account for BSB.
Note: See part 1 of the attached excel file for the T-account.
In the attached excel, the following calculations are made:
Reserves = $500 million * 20% = $100 million
Loans = $500 - $100 = $400
2. Now suppose that BSB's largest depositor withdraws $25 million in cash from her account. BSB decides to restore its reserve ratio by reducing the amount of loans outstanding.
Note: See part 2 of the attached excel file for the T-account.
In the attached excel, the following calculations are made:
Deposits = $500 million - $25 million = $475 million
Reserves = $475 million * 20% = $95 million
Loans = $475 - $95 = $380
3. Because BSB is cutting back on its loans, other banks will find they have <u>lower</u> reserves, causing them to <u>reduce</u> their loans. Which of the following ways represent an alternative for BSB to return to its original reserve ratio? Check all that apply.
4. Which of the following ways represent an alternative for BSB to return to its original reserve ratio? Check all that apply.
The correct options are b. Borrow money from another bank and d. Attract additional deposits.
