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25 October, 16:11

If a bank experiences a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, which balance sheet would the bank rather have initially: Balance sheet A or balance sheet B? Why? Balance Sheet A Assets Liabilities Reserves $75 million Deposits $500 million Loans $525 million Capital $100 million Balance Sheet B Assets Liabilities Reserves $100 million Deposits $500 million Loans $500 million Capital $100 million

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  1. 25 October, 17:10
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    Balance Sheet B

    Explanation:

    Given dа ta:

    Balance Sheet A

    Assets Liabilities

    Reserves- - $75 million Deposits - -$500 million

    Loans- - $525 million Capital - -$100 million

    Balance Sheet B

    Assets Liabilities

    Reserves- - $100 million Deposits- - $500 million

    Loans-- - $500 million Capital- - $100 million

    Representing each balance sheet as follows:

    Balance Sheet A

    Assets Amount Liabilities Amount

    Reserves $75 million Deposits $500 million

    Loans $525 million Capital $100 million

    Total: $600 $600 million

    Balance Sheet B

    Assets Amount Liabilities Amount

    Reserves $100 million Deposits $500 million

    Loans $500 million Capital $100 million

    Total: $600 million $600 million

    When there is a deposit of $50 million, the bank would be better off with balance sheet B because it initially has a higher amount of reserves. An outflow of $50 million would reduce the amount of reserves by $50 million since the bank has to maintain certain amount of required reserves held as assets to meet this requirement.
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