Question

1. The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent.

1. Using balance sheet A, how would this look.
2. How much excess reserves currently exist for the bank?

2. Households deposit $5000 in currency into the bank that is added to reserves. (Show this addition on the balance sheet A.
   1. What level of excess reserves does the bank now have?
   2. Assuming the excess reserves become loans, what would this look like on the balance sheet A.

3. Supposed again that the Third National Bank has reserves of $20,000 and checkable l deposits of $100,000. The reserve ratio is 20%. The bank now has $5,000 in securities.
   1. Using Balance sheet B, how would this look?
4. Third National now sells the securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return (assume the Fed simply prints the money).
   1. What level of excess reserves does the bank now have?
   2. Assuming the excess reserves become loans, show what this would look like on Balance sheet B.

Why does your answer differ from the answer to question 2a and 3 a? Suppose a bank discovers that its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds rate? Now assume the bank finds that its reserves will be substantially and permanently deficient. What remedy is available to this bank?

Balance Sheet A

Assets	Net Worth + Liabilities

Balance Sheet B

Assets	Net Worth + Liabilities

Answer 1