Question

Beleaguered State Bank (BSB) holds $500 million in deposits and maintains a reserve ratio of 20 percent. Complete the following T-account for BSB.
Beleaguered State Bank
Assets Liabilities
Reserves million Deposits million
Loans million

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.

Complete BSB's new T-account after it has taken this action.

Beleaguered State Bank
Assets Liabilities
Reserves million Deposits million
Loans million

Because BSB is cutting back on its loans, other banks will find they have _____________ reserves, causing them to ______________ their loans. Which of the following ways represent an alternative for BSB to return to its original reserve ratio? Check all that apply.

a. Lend money
b. Borrow money from another bank
c. Borrow money from the Fed
d. Attract additional deposits

Answer 1

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 lower reserves, causing them to reduce 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 lower reserves, causing them to reduce 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.

Download xlsx