Question

Suppose that Karen deposits $500 into her checking account at the bank. The reserve requirement for Karen's bank is 12%. Assume the bank does not want to hold any excess reserves of new deposits. a. Use this information to complete the balance sheet below to show how the bank's assets and liabilities change when Karen deposits the $500. Instructions: Enter your answers as a whole number. A Simple Bank Balance Sheet Assets Liabilities Change in Reserves: $ Change in Deposits: $ Change in Loans: $ b. Why are deposits considered liabilities for a bank? Deposits can be loaned out by the bank. The bank must pay interest on deposits. The bank must hold deposits as reserves at the Federal Reserve. Deposits can be withdrawn at any time.

Answer 1

Answer:

a)Bank deposit increase by $500

b)Bank reserve increase by $60

c)Funds available for loan increase by $440

d) Deposit can be withdrawn anytime

Explanation:

Deposit = $500

Change in reserve = 12%* $500 = $60

Change in deposit = $500

Change in loan = (100-12)%*500 = $440.

Deposit is like a loan given to the bank as the bank uses these money for her transactions . This money can be requested for withdrawal by the depositor at any time, This makes it a type  of liability to the bank

Answer 2

a) It rise by $500.

b) It rises by $60.

c) Funds available for loan rise by $440.

d) Deposit can be withdrawn anytime.

• The calculation is as follows:

a. Deposit = $500

b. Change in reserve is

= 12% of $500

= $60

c.

Change in deposit = $500

Now

Change in loan is

= (100 - 12)% of 500

= $440.

d.

• The deposit is treated as the loan i.e. provided to the bank as the bank use the money for their transactions.
• So it is a liability to the bank also, it can be withdrawal at any time.  

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