Concept explainers
Subpart (a):
Balance sheet .
Subpart (a):
Explanation of Solution
The
The excess reserves are evaluated as follows:
$2,000 is the excess reserve, so the increase in loans is $2,000. Initially, securities and reserves do not change. The people who have borrowed money will have the same amount that will be credited to his or her account for the loan taken, once the loan is made by the bank. So, there will be a rise in checkable deposits for $2,000. Hence, $2000 is the utmost amount of loans that can be made by Big Bucks Bank
Table -1 illustrates the balance sheet of the bank after lending extra money.
Table -1
Assets | Liabilities and net worth | ||||
(1) |
(1) | ||||
Reserves | $22,000 | $22,000 | Checkable Deposits | $100,000 | $102,000 |
Securities | 38,000 | 38,000 | |||
Loans | 40,000 | 42,000 | |||
Concept Introduction:
Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.
Subpart (b):
Rise in money supply.
Subpart (b):
Explanation of Solution
There is a rise of $2,000 in checkable deposits. A monetary multiplier is not considered till now, so transaction has an immediate effect which is a $2,000 rise in the supply of money.
Subpart (c):
Balance sheet.
Subpart (c):
Explanation of Solution
Table -2 illustrates the new balance sheet.
Table -2
Assets | Liabilities and net worth | ||||||||||
(1) | (1) | (2) | |||||||||
Reserves | $22,00 | $22,000 | $20,000 | Checkable deposits | $100,000 | $102,000 | $100,000 | ||||
Securities | 38,000 | 38,000 | 38,000 | ||||||||
Loans | 40,000 | 42,000 | 42,000 | ||||||||
Once the checks against the loan are drawn, there will be a fall of $2,000 in checkable deposits. Once these checks are cleared, the reserves go down by $2,000.
Concept Introduction:
Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.
Subpart (d):
Balance sheet.
Subpart (d):
Explanation of Solution
On the basis of sub part (a), the required reserves are evaluated as follows:
Hence, the required reserves are $15,000.
Excess Reserves are evaluated as follows:
Hence, the excess reserves are $7,000.
$7,000 is the excess reserve, so the increase in loans is $7,000. Initially, securities and reserves do not change. The people who have borrowed money will have the same amount that will be credited to his or her account for the loan taken once the loan is made by the bank. So, there will be a rise in checkable deposits for $7,000.
Table -3 shows the bank’s balance sheet will appear after the bank has lent this additional amount and is obtained from the given diagram.
Table-3
Assets | Liabilities and net worth | ||||
(1) | (1) | ||||
Reserves | $22,000 | $22,000 | Checkable Deposits | $100,000 | $107,000 |
Securities | 38,000 | 38,000 | |||
Loans | 40,000 | 47,000 | |||
On the basis of sub part (b), there is a rise of $7,000 in checkable deposits. Monetary multiplier is not considered till now, so the transaction has an immediate effect which is a $7,000 rise in supply of money.
On the basis of sub part (c), once the checks against the loan are drawn, there will be a fall of $7,000 in checkable deposits. Once these checks are cleared, the reserves go down by $7,000.
Table -4 shows the new balance sheet that is illustrated below.
Table -4
Assets | Liabilities and net worth | ||||||||||
(1) | (1) | (2) | |||||||||
Reserves | $22,00 | $22,000 | $20,000 | Checkable deposits | $100,000 | $107,000 | $100,000 | ||||
Securities | 38,000 | 38,000 | 38,000 | ||||||||
Loans | 40,000 | 47,000 | 47,000 | ||||||||
Concept Introduction:
Balance sheet: Itis a financial statement that encapsulates organizations’ assets, their liabilities and equity of the shareholders at a particular point in time.
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