Question

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Paolo, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank.

a. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).

Assets Liabilities

b. Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

(Dollars) (Dollars) (Dollars)
750,000

Answer 1

Answer and Explanation:

a. The completion of the following table to reflect any changes in First Main Street Bank's T-account is shown below:-

First Main Street Bank's Balance Sheet

Assets Amount Liabilities Amount

Reserves $750,000 Checkable Deposits $750,000

b. The completion of the following table to show the effect of a new deposit on excess and required reserves is shown below:-

Amount deposited Change in excess Change in required

reserves reserves

$750,000 $600,000 $150,000

($750,000 - $150,000) ($750,000 × 20%)