Question

If a bank experiences a deposit outflow of​ $50 million with a required reserve ratio on deposits of​ 10%, which balance sheetLOADING... would the bank rather have​ initially: Balance Sheet A or Balance Sheet B​? ​Why?

Answer 1

Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.

Step-by-step explanation:

Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet and $50 million deposit outflow means that reserves reduced by $50 million to $25 million. Since required reserves are $45 million (10% of the $450 million of deposits), which means the bank needs to acquire $20 million of reserves and the reserve can be obtain by either calling in or selling off $20 million of loans, borrowing $20 million in discount loans from the Fed, borrowing $20 million from other banks or corporations, selling $20 million of securities, or the combination of all.