A bank has reserves of $50, deposits of $100, loans of $20, and government securities of $30. Assume the desired reserve ratio is 20 percent
a. What are the bank's assets and what are its liabilities?
b. How much does the bank have in excess reserves?
c. What can the bank do with its excess reserves that will affect the quantity of money?
a. Assets are reserves, loans, and securities. Liabilities are deposits.
b. The excess reserves are $30, equal to the actual reserves of $50 minus the desired reserves of $20 (= 20 percent of $100 of deposits).
c. The bank can use its excess reserves to make loans. When it makes the loan, it will increase the quantity of money.
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