1 The reserve requirement is 0 percent on the first 60 milli

1. The reserve requirement is 0 percent on the first $6.0 million in transaction deposits, 3 percent on amounts between $6.0 million and $42.1 million, and 10 percent on amounts above $42.1 million The First Bank of Boston has the following assets and liabilities (all amounts in millions of dollars): Assets Reserves Loans Securities 5.0 345.0 70.0 LiabilitiesCapital Transaction deposits Nontransaction deposits Equity capital Calculate the bank\'s excess reserves. Show your work. 75.0 315.0 30.0 a. Suppose First Bank makes a loan to a customer equal to $0.5 million. Calculate the bank\'s excess reserves before the customer spends the proceeds of the loan Show your work. b. c. Now suppose the customer spends the proceeds of the loan. Calculate the banks excess reserves. Show your work

Solution

a)

Because transactions deposits exceed $42.1 million,

Amounts covered by each reserve requirement =

Required reserves = [(42.1 - 6.0) * 0.03 ]+ [(75.0 - 42.1) x 0.10]

=1.083million + 3.290 million

= 4.373 million

Total reserves = 5.0 million

Excess reserves= Total reserves - Required reserves

= 5.0 - 4.373

= 0.627 million

b)

Required reserves = [(42.1 - 6.0) * 0.03 ]+ [(75.5 - 42.1) x 0.10]

=1.083million + 3.34 million

= 4.423 million

Excess Reserves = Actual Reserves - Required Reserves

= 5.0 - 4.423

= 0.577 million

c)

Excess Reserves = Actual Reserves - Required Reserves

Excess Reserves = 5 - 5

Excess Reserves = 0