Consider the balance sheet below for Third National Bank Assets Liabilities and
ID: 1121585 • Letter: C
Question
Consider the balance sheet below for Third National Bank Assets Liabilities and Net Worth Reserves 40,000 Checkable deposits Capital stock Total $100,000 $30,000 $130,000 Property$90,000 Total $130,000 The required reserve ratio is 10%. 4.2. Third National has reviewed Fred's loan application and has decided to approve the loan. Fred borrows the $20,000 to pay for college-related expenses. Fred deposits the $20,000 in his checking account at Third National because tuition is not due for another week. At the moment the loan is completed, what are the new entries in the bank's balance sheet? A. Third National should not make this loan, there are insufficient reserves. B. The bank's reserves decrease by $20,000 and its loans increase by $20,000. C. The bank's liabilities are reduced by $20,000 and its assets increase by $20,000 0 D. checkable deposits increase by $20,000 and the capital stock decreases by $20,000. E. Loans increase by $20,000 and checkable deposits increase by $20,000Explanation / Answer
Correct option is (E).
When Fred deposits $20,000 in checking account, this is a liability and checkable deposits increase by $20,000. Assuming full loan amount is approved, amount of loans (an asset) increases by $20,000 at the same time.