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Suppose you remove $1,000 from under your mattress and deposit it in First National Bank. Using a balance sheet, show the impact of your deposit on the bank’s assets and liabilities. If the required reserve ratio is 10 percent, what is the maximum amount the bank can loan from this deposit?

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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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BuyFindarrow_forward

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter 25, Problem 6SQP
Textbook Problem
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Suppose you remove $1,000 from under your mattress and deposit it in First National Bank. Using a balance sheet, show the impact of your deposit on the bank’s assets and liabilities. If the required reserve ratio is 10 percent, what is the maximum amount the bank can loan from this deposit?

To determine

The impact on bank’s balance sheet and lending capacity after making a deposit of $1,000 in bank.

Explanation of Solution

When the consumer deposits the amount of $1,000 to the bank, it will increase the reserves of the bank as well as the lending capacity of the bank. When the required reserve ratio is 10 percent, the excess reserves that can be used for the loan creation and can be calculated by reducing the required reserve from the total deposit of $1,000. This can be illustrated with the help of the balance sheet of the bank as follows:

FN Bnak
Balance Sheet
Assets

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