**Banking Reserves and Deposits: An Educational Overview****Scenario:**Consider three banks: First Main Street Bank, Second Republic Bank, and Third Fidelity Bank, all of which currently have zero excess reserves. The required reserve ratio is set at 10%. Nick, a client of First Main Street Bank, makes a deposit of $500,000 into his checking account at the same bank.**Bank T-Account Analysis:**The first step is to adjust First Main Street Bank's T-account, which needs to reflect the changes in its assets and liabilities brought about by Nick's deposit. As the bank has not issued new loans yet, this adjustment focuses solely on the present state of finances.**Assets and Liabilities Table:**- **Assets:** Increased by the deposit amount due to a rise in cash reserves.- **Liabilities:** Increased by the deposit amount since it represents a payable to the customer (Nick).**Reserve Adjustment Table:**This table illustrates how a new deposit alters the reserves, assuming a required reserve ratio.- **Hint:** In the table, if any value reflects a negative change, it should be entered as a negative number.| Amount Deposited (Dollars) | Change in Excess Reserves (Dollars) | Change in Required Reserves (Dollars) ||-----------------------------|-------------------------------------|---------------------------------------|| 500,000 | | |**Calculations:**- **Change in Required Reserves:** 10% of $500,000, which is $50,000.- **Change in Excess Reserves:** The remaining amount after adjusting for required reserves, which is $500,000 - $50,000 = $450,000.This setup provides a practical understanding of how banks handle deposits based on reserve requirements.

We are going to use concepts such as required reserves and excess reserves for the management of assets and liability of a bank.When Nick deposits $500,000 into his checking account then Reserves for First Main Bank is created at the Asset side and parallely Liability position also be recorded as Checking deposits worth $500,000. Reserves = Excess Reserves + Required Reserves Assets Liabilities Reserves = $500,000 Checking Deposits =$500,000 We have required reserve ratio to be equal to 10%. Required reserves to be maintained in this case equals to Required reserve ratio * Deposits = 10%*500,000 =$50,000 Therefore Excess reserves will get reduced Excess Reserves = Amount deposited-Required Reserves = $500,000-$50,000=$450,000 Amount Change in Excess Reserves Change in Required Reserves $500,000 $450,000 $50,000 ($500,000*10%=$50,000)

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Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Nick, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 500,000

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Nick, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 500,000

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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