378 $
© 2014 Pearson Canada Inc.$- Assume that a customer deposits $1000 in her bank. Show in a T-account the effect of this
deposit. If the bank is subject to reserve requirements (as some bank in other countries are), show
in a second T-account the banks balance sheet indicating required and excess reserves, assuming
a 5 percent required reserve ratio. In a third T-account, show the change in the bank's balance
sheet when the bank makes loans with the excess reserves.
Answer:
Reserves
$1000
Chequable deposits
$1000
Required reserves
Excess reserves
$100
$900
Chequable deposits
$1000Required reserves
Loans
$100
Chequable deposits
$1000
$900Diff: 3 Type: SA Page Ref: 300 - 302
Skill: Applied
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
- Credit Atlantic Bank has the following balance sheet:
Reserves
Canada Bonds
Loans
$20
$30
$80
Chequable deposits
Bank Capital$120
$10
The bank's desired reserve ratio is 10 percent and there is a withdrawal of cash from chequable
deposits equal to $20. Describe what is likely to happen in the bank's balance sheet and produce
the new balance sheet for Credit Atlantic Bank.
Answer: The students must show that after the $20 withdrawal, chequable deposits and reserves
will go down to $100 and $0 respectively. Then, since the desired reserve ratio is 10 percent, the
managers of the bank will need $100*10 percent=$10 as reserves. The most likely way of
increasing their reserves from $0 to $10 would be by selling Canada bonds that worth $10. They
will do this instead of calling in loans as this is the most liquid of their assets and also this
change will not harm the bank's customers. Thus, the new balance sheet will be:
Reserves
Canada Bonds
Loans
$10
$10
$80
Chequable deposits
Bank Capital$100
$10
Diff: 3 Type: SA Page Ref: 297 - 300
Skill: Applied
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans