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)
Balance Sheet
Assets Liabilities
Loans $90,000 Demand Deposits $140,000
Cash 30,000
Reserves 20,000
Question 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.
Question 2. Can MNB make any additional loans? If so, how much?
Question 3. If MNB makes all the new loans it can, what would the new balance sheet look like?
Question 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.
Question 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.