Answer:
a) First Main Street Bank's T-account (before the bank makes any new loans) will look as follows:
<u> Assets | Liabilities </u>
Reserves $1,800,000 | Deposits $1,800,000
b) The effect of a new deposit on excess and required reserves when the required reserve ratio is 25% are as follows:
Amount Deposited (Dollars) = $1,800,000
Change in Excess Reserves (Dollars) = $1,350,000
Change in Required Reserves (Dollars) = $450,000
Explanation:
a) Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans)
A deposit of $1,800,000 by Yakov into his checking account at First Main Street Bank will lead to the creation of both an asset and a liability for First Main Street Bank.
The reserves on the asset side of the T-account of First Main Street Bank will therefore increase by $1,800,000. This gives the bank the opportunity to able to give loan to its other customers from the additional reserves.
On the other hand, the deposit of $1,800,000 by Yakov will be recorded as a demand deposit on the liability side of the T-account of First Main Street Bank. This is because it is possible for Yakov to withdraw his deposit at any time.
This transaction will therefore be reflected as follows:
<u> Assets | Liabilities </u>
Reserves $1,800,000 | Deposits $1,800,000
b) Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 25%.
Note: See the attached excel file to see how the table will actually look.
The required reserve ratio of 25% implies that First Main Street Bank is required by law to hold 25% of the new reserves which in this case is the initial deposits from Yakov.
By calculating this, 25% of $1,800,00 is $450,000 and it indicates an increase of $450,000 in the required reserve of First Main Street Bank.
After deducting 25% from 100%, we have 75% left. And 75% of $1,800,000 is $1,350,000. This $1,350,000 is the excess reserves that First Main Street Bank can use to give loans to other customers.
The breakdown is therefore as follows:
Amount Deposited (Dollars) = $1,800,000
Change in Excess Reserves (Dollars) = 75% * $1,800,000 = $1,350,000
Change in Required Reserves (Dollars) = 25% * $1,800,000 = $450,000
