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Question: assets reserves 75000 loans 430000 liabilities deposites ...

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Assets-   reserves: 75000 loans : 430000

liabilities : deposites : 500000 net worth : 5000

a) Suppose that a bank has the following balance sheet and you deposit $5000 in currency into your cheque account at such bank. Use a T-account to show the initial impact of this transaction on the bank’s balance sheet. What is the impact of this transaction on M1?

 

(b) If the bank holds a reserve ratio of 0.1, what is the maximum amount the bank can loan out. Suppose that the bank intends to loan out the maximum amount it can. Show the impact of the loan on the balance sheet.

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