QUESTIONSOPOINTS 1 The following is a simplified balance she

QUESTION-SO-POINTS) 1) The following is a simplified balance sheet for American Bank & Trust Company: American Bank &Trust; Co. Assets Liabilities Required reserves $10,000 Excess reserves $ 5,000 $85,000 Demand deposits $100,000 Loans Owner\'s equity $ 0 What is the reserve requirement? Assume that Frank Mateo withdraws $5000 in cash from his checking account at American Bank & Trust. a. By how much will American Bank & Trust\'s reserves change . based on Frank\'s withdrawal? money supply? Explain. reserves on the balance sheet of American Bank & Trust based on b. What is the initial effect of the withdrawal on the M1 measure of c. As a result of the withdrawal, what is the new value of excess the reserve requirement from part (a)? A) Assume the next day Angelo Giovanni withdraws from American Bank & Trust an amount that exceeds the bank\'s excess reserves. Assuming that no loans are called in, how can American Bank & Trust cover its required reserves? rth nf ooods to a firm in Argentina

Solution

1.

Reserve Requirements = Required reserve / demand deposits = 10000/100000 = 10%

2.

a.

After the withdrawal of $5000,

Demand deposit with the bank = 100000-5000 = $95000

So, required reserve = 10%*95000 = $9500

Change in required reserve = 10000 – 9500 = $500

New Excess Reserve = 5000 – 5000 + 500 = 500

So, change in excess reserve = 500 – 5000 = $4500 (-ve)

Hence, required reserve will come down to $9500 and Excess reserve will come down to $500.

b.

Demand deposit and cash with the people are the part of M1 money supply. So, shift of $5000 from the demand deposit to the cash with the people, will not bring any change to M1 money supply initially.

c.

New Excess Reserve = 5000 – 5000 + 500 = 500

New value of the excess reserve = $500

A.

In the given scenario, the bank will take loan from the Federal Reserve or central bank at the federal funds rate to cover its required reserve. It is the reason that Federal Reserve or central banks are considered as banker of the banks.