Answer :
Answer:
a) First Main Street Bank's T-account (before the bank makes any new loans) will look as follows:
Assets | Liabilities
Reserves $1,800,000 | Deposits $1,800,000
b) The effect of a new deposit on excess and required reserves when the required reserve ratio is 25% are as follows:
Amount Deposited (Dollars) = $1,800,000
Change in Excess Reserves (Dollars) = $1,350,000
Change in Required Reserves (Dollars) = $450,000
Explanation:
a) Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans)
A deposit of $1,800,000 by Yakov into his checking account at First Main Street Bank will lead to the creation of both an asset and a liability for First Main Street Bank.
The reserves on the asset side of the T-account of First Main Street Bank will therefore increase by $1,800,000. This gives the bank the opportunity to able to give loan to its other customers from the additional reserves.
On the other hand, the deposit of $1,800,000 by Yakov will be recorded as a demand deposit on the liability side of the T-account of First Main Street Bank. This is because it is possible for Yakov to withdraw his deposit at any time.
This transaction will therefore be reflected as follows:
Assets | Liabilities
Reserves $1,800,000 | Deposits $1,800,000
b) Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 25%.
Note: See the attached excel file to see how the table will actually look.
The required reserve ratio of 25% implies that First Main Street Bank is required by law to hold 25% of the new reserves which in this case is the initial deposits from Yakov.
By calculating this, 25% of $1,800,00 is $450,000 and it indicates an increase of $450,000 in the required reserve of First Main Street Bank.
After deducting 25% from 100%, we have 75% left. And 75% of $1,800,000 is $1,350,000. This $1,350,000 is the excess reserves that First Main Street Bank can use to give loans to other customers.
The breakdown is therefore as follows:
Amount Deposited (Dollars) = $1,800,000
Change in Excess Reserves (Dollars) = 75% * $1,800,000 = $1,350,000
Change in Required Reserves (Dollars) = 25% * $1,800,000 = $450,000
The reserve ratio is part of the reservable liabilities that commercial banks should hold on to, rather than lending or investing.
What is a reserve ratio?
This is a requirement determined by the country's largest bank, the United States Federal Reserve. It is also known as the cash reserve ratio.
As per the information, the calculation of the reserve ratio from the government bond:
[tex]\rm\,25\% \,of \,1,800,000 = 450,000\\\\Excess \; reserves = 1,800,000 - 450,000 = 1,350,000[/tex]
Now, this 1,800,000 will be part of demand deposits on the Assets side, and on the liability side, it will form part of the reserves.
Assets I Liabilities
Reserves $1,800,000 | Deposits $1,800,000
Secondly, the required reserve to be maintained from the reserves is $450,000 and the excess reserve is $1,350,000 that can be utilised for lending loans to the Public.
Hence, the amount of reserve ratio that First Main street Bank will maintain is $450,000.
To learn more about reserve ratio, refer:
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