Question

Part 3: More Practice- Below is the balance sheet for

Bank of 'Merica. Identify the following immediately after
Lindsey withdraws $1,000 of cash from the bank.
Assets
Liabilities
Required reserves $1,000 Demand deposits $10,000
Owner's equity
Excess reserves
$2,000
$5,000
Customer loans
$10,000
?
Government bonds
8. The reserve ratio
9. Government bonds
10. Demand deposits
11. Required reserves
12. Excess reserves

Answer 1

After Lindsey withdraws $1,000, the Bank of 'Merica's assets and demand deposits both decrease by $1,000, while required reserves remain the same if the reserve ratio is met. Excess reserves decrease by $1,000, and government bonds have no immediate change.

Step-by-step explanation:

When Lindsey withdraws $1,000 of cash from the Bank of 'Merica, the bank's balance sheet is immediately affected as follows:

• The bank's assets decrease by $1,000 as cash is taken out of the bank.
• The demand deposits on the liabilities side also decrease by $1,000, as this represents a reduction in the money owed to customers.
• Required reserves would remain unchanged unless the reserve ratio also requires adjustment due to the withdrawal.
• The $1,000 withdrawal reduces the bank's excess reserves by $1,000, assuming the bank was holding this amount in excess before the withdrawal.
• Government bonds and customer loans remain unchanged unless the bank decides to sell assets to cover the withdrawal.

Therefore, immediately after the withdrawal, the adjusted balance sheet for Bank of 'Merica is:

• Assets: Decrease by $1,000
• Liabilities (Demand deposits): Decrease by $1,000
• Required reserves: No change (if reserve ratio is met)
• Excess reserves: Decrease by $1,000
• Government bonds: No immediate change