Question

The balance sheet for ACME Bank is shown below. ACME Bank Balance Sheet 1 Assets Liabilities and net worth Reserves $ 107,500 Checkable $ 120,000 deposits Loans $ 28,500 Stock shares $ 290,000 Property $ 274,000 Suppose the bank decides to invest 40 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at a different bank. What will ACME Bank's balance sheet look like after the check has been processed? Fill in the values in the table below. Assume a required reserve ratio of 16 percent. Instructions: Enter your answers as whole numbers. ACME Bank Balance Sheet 2 Assets Liabilities and net worth Checkable Reserves deposits Loans Stock shares Securities Property

Answer 1

Answer:

Given:

ACME Bank Balance Sheet
Assets		Liabilities and Net worth
Reserves	$107,500	Checkable deposits	$120,000
Loans	$28,500	Stock shares	$290,000
Property	$274,000

The required reserve ratio is 16%.

So the ACME bank's required ratio is 120,000 * 16% = 120,000 * 16/100 = $19,200

Required Reserve is the reserve ratio percentage of checkable deposit.

Required Reserve = $19,200

Reserves = $107,500

Excess reserves = Reserves - Required Reserve

Excess Reserves = $107,500- $19,200

Excess Reserve = $88,300

Now the bank invest 40% percent of excess reserves in short term securities.

It means it invest 40% of 88,300 = 88,300 * 40/100 = $35,320

Now after the check has been processed the ACME bank is left with

- Reserves = $107,500 - $35,320 = $72,180

Now the bank's asset increase by securities of $35,320

ACME Bank Balance Sheet
Assets		Liabilities and Net worth
Reserves	$72,180	Checkable deposits	$120,000
Loans	$28,500	Stock shares	$290,000
Securities	$35,320
Property	$274,000