Monetary Policy and Reserves
You are analyzing the financials for the Marysville National Bank (MNB), and know that the Fed has imposed a 10% reserve requirement. Using this abbreviated balance sheet, answer the questions listed below.
Maryville National Bank (MNB)
Loans $90,000 Demand Deposits $140,000
1. What are excess reserves? What are required reserves? Does MNB have any excess reserves? If so, how much?
MNB has ($140,000 *10% =) $14,000 in the required reserves. $20,000-$14,000=$6,000 in excess which can be loaned out.
2. Can MNB make any additional loans? If so, how much?
3. If MNB makes all the new loans it can, what would the new balance sheet look like?
4. If all the possible loans are made, would the money supply change? If so, by how much? Explain how the money supply might change initially, and then over time.
5. Assume now that the Fed imposes a more restrictive monetary policy by increasing the reserve requirement to 20%. Using the initial balance sheet above, answer questions 1-4 again. Show what the revised balance sheet would look like and describe all changes that will occur as a result of the change in reserve requirement.
I think I am on the right track but I am unable to find a sample problem in my readings or online to help me with having the reserves already in the assets column. I need some help making sure I am on the right track and understanding the concepts correctly.
>1. What are excess reserves? What are required reserves? Does MNB have any excess reserves? If so, how much?
MNB's required reserves are its liabilities times the required reserve ratio (RRR). MNB's liabilities are its demand deposits and the RRR is 0.1, so MNB's required reserves are ($140,000*0.1 = ) $14,000.
MNB's excess reserves are its actual reserves minus its required reserves. MNB's excess reserves are therefore $6000.
>2. Can MNB make any additional loans? If so, how much?
MNB can extend new loans in the amount of (excess reserves/RRR). It can therefore extend ($6000/0.1 = ) $60,000 in new loans.
>3. If MNB makes all the new loans it can, what would the new balance ...
This solution shows how to calculate a bank's excess reserves, and how to calculate the changes to a bank's balance sheet caused by a change in the Required Reserve Ratio (RRR). All calculations are fully explained.