Assume that there are two banks, A and Z in the banking system. Bank A receives
ID: 2672200 • Letter: A
Question
Assume that there are two banks, A and Z in the banking system. Bank A receives a primary deposit of $600,000 and it must keep reserves of 12 % against deposits. Bank A makes a loan in the amount that can be safely lent.a. Show what bank A’s balance sheet of assets and liabilities would look like immediately after the loan
b. Assume that a check is drawn against the primary deposit made in Bank A and is deposited in Bank Z. Show what the balance sheet of assets and liabilities would look like for each of the two banks after the transaction has taken place.
c. Now assume that bank Z makes a loan I the amount that can be safely lent against the funds deposited in its bank from the transaction described in (b). Show what Bank Z’s balance sheet of assets and liabilities would look like after the loan.
Explanation / Answer
Bank A
Liabilities
Amount
Assets
Amount
600000
Loans given
528000
cash
72000
600000
600000
Bank B
Liabilities
Amount
Assets
Amount
600000
cash
600000
600000
600000
600000
b
Bank A
Liabilities
Amount
Assets
Amount
0
0
0
0
0
Bank b
Liabilities
Amount
Assets
Amount
1200000
cash
1200000
1200000
1200000
=========
c
Liabilities
Amount
Assets
Amount
1200000
cash
1056000
144000
1200000
1200000
Bank A
Liabilities
Amount
Assets
Amount
600000
Loans given
528000
cash
72000
600000
600000
Bank B
Liabilities
Amount
Assets
Amount
600000
cash
600000
600000
600000
600000