1. Suppose that the reserve requirement is 10 percent and the balance sheet of the People’s
National Bank looks like the accompanying example.
(a) What are the required reserves of People’s National Bank?( $
Does the bank have any
excess reserves? If yes, how much? ($)
With the required reserve being 10% of the amount deposited, that leaves 90% as the excess
reserve. This 90% can be loaned out, but $20,000 must be kept, as this is the required amount
of reserve off of the $200,000 amount deposited. The bank would then have excess reserve,
that being $180,000.
(b) What is the maximum loan that the bank could extend? ( $)
Legally, the bank could loan out $120,000. With them doing this, this is better than the full
excess reserve, which would be $180,000 and $60,000 would be used for security and other
purposes.
(c) Briefly explain how the bank’s balance sheet would be altered if it extended this loan.
