Suppose The t Account For First National Bank Is As Follows

Suppose The t Account For First National Bank Is As Follows, suppose that the t-account for first national bank is as follows:
Assets liabilities
Reserve $100.000 Deposits $500.000
Loan 400.000
a. if the Fed requires banks to hold 5% of deposits as reserves, how much in excess reserves does First national now hold?
b. assume that all other banks hold only the required amount of reserves. if First national decides to reduce its reserves to only the required amount, by how much would the economy’s money supply increase?

Suppose the T-account for First National Bank is as follows:?

Assets:Reserves $100,000 Loans: 400,000.00 Liabilities:Deposits:$500,000.00 a.)If the Fed requires banks to hold 5% of deposits as it reserves, how much in excess reserves does First National now hold?b.)

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Answers

Best Answer: a. $75,000, since 5% of 500,000 is $25,000 and current reserves are $100,000, therefore answer is $75,000 (100,000 – 25,000), it would also increase by the same amount.

b. If the fed sells $1 million, it means they are trying to decrease the money supply, this increases the nations reserves

One has to look at the current economic climate, the Feds have lowered the reserves tremendously however banks have large reserves on hand, what happens is that the bank is probably trying to cushion itself from uncertainty and there is less money out there to be used which could affect the economy especially the multiplier effect that the Feds hope would stimulate the economy with more spending. This is a Monetary policy currently being used by the Feds.