Solved) - Worksheet 25.3: T-Accounts The Bank Has A 10% Reserve ... - Free Printable

Let's solve this step-by-step using the T-account method and principles of fractional reserve banking, where banks keep only a fraction (10% in this case) of deposits as reserves and can lend out the rest.

---

Given:

- Reserve requirement = 10%
- We’ll track changes to:
- Assets: Required Reserves, Excess Reserves, Loans
- Liabilities: Checkable Deposits

We'll go through each transaction.

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1. Eli has $5000 in cash and decides to open a checking account at Main Street Bank

Eli deposits $5,000 into the bank.

#### Effect on T-Accounts:
- Checkable Deposits (Liability) ↑ by $5,000
- Reserves (Asset) ↑ by $5,000

Now calculate required and excess reserves:
- Required Reserves = 10% × $5,000 = $500
- Excess Reserves = $5,000 – $500 = $4,500

> The bank keeps $500 in required reserves and can lend out $4,500.

#### T-Account:
```
ASSETS | LIABILITIES
--------------------------------|-------------------
Required Reserves: $500 | Checkable Deposits: $5,000
Excess Reserves: $4,500 |
Loans: $0 |
```

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2. Melanie’s Furniture Mart seeks a loan from Main Street Bank. The bank loans Melanie the maximum amount they can loan out.

The bank can lend out its excess reserves → $4,500.

So, it makes a $4,500 loan.

#### Effect on T-Accounts:
- Loans (Asset) ↑ by $4,500
- Excess Reserves (Asset) ↓ by $4,500 (used to fund the loan)
- No change to liabilities yet.

But when the loan is made, the bank credits Melanie’s account with $4,500 (which becomes a new deposit), so checkable deposits will increase later (in step 3).

For now, just record the loan:

#### T-Account:
```
ASSETS | LIABILITIES
--------------------------------|-------------------
Required Reserves: $500 | Checkable Deposits: $5,000
Excess Reserves: $0 |
Loans: $4,500 |
```

> Note: After lending, excess reserves drop to zero.

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3. Melanie deposits the money she borrowed into her account at Main Street Bank.

Melanie takes the $4,500 loan and deposits it into her checking account at the same bank.

This means:
- Checkable Deposits (Liability) ↑ by $4,500
- Reserves (Asset) ↑ by $4,500 (because the bank receives the funds)

Now, calculate new required reserves:
- New total deposits = $5,000 + $4,500 = $9,500
- Required Reserves = 10% × $9,500 = $950
- Current reserves = $500 (required) + $0 (excess) + $4,500 (from deposit) = $5,000
- So, Excess Reserves = $5,000 – $950 = $4,050

#### T-Account:
```
ASSETS | LIABILITIES
--------------------------------|-------------------
Required Reserves: $950 | Checkable Deposits: $9,500
Excess Reserves: $4,050 |
Loans: $4,500 |
```

> The bank now has $4,050 in excess reserves that it can lend out again.

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4. Sean wants to buy new living room furniture for his home. Main Street Bank loans Sean the maximum amount it can loan out.

Maximum loanable amount = Excess Reserves = $4,050

Bank makes a $4,050 loan.

So:
- Loans (Asset) ↑ by $4,050 → Total loans = $4,500 + $4,050 = $8,550
- Excess Reserves (Asset) ↓ by $4,050 → Now $0

But again, when the loan is made, it will be deposited somewhere (in step 5), increasing deposits.

#### T-Account:
```
ASSETS | LIABILITIES
--------------------------------|-------------------
Required Reserves: $950 | Checkable Deposits: $9,500
Excess Reserves: $0 |
Loans: $8,550 |
```

---

5. Sean buys the furniture from Melanie’s Furniture Mart and Melanie deposits the money in her account at Main Street Bank.

Sean uses the $4,050 loan to pay Melanie’s Furniture Mart. Melanie deposits the $4,050 into her account at Main Street Bank.

So:
- Checkable Deposits (Liability) ↑ by $4,050 → New total = $9,500 + $4,050 = $13,550
- Reserves (Asset) ↑ by $4,050 (bank receives the deposit)

Now compute new required reserves:
- Required Reserves = 10% × $13,550 = $1,355
- Current reserves = $950 (required) + $0 (excess) + $4,050 (new deposit) = $5,000
- So, Excess Reserves = $5,000 – $1,355 = $3,645

#### T-Account:
```
ASSETS | LIABILITIES
--------------------------------|-------------------
Required Reserves: $1,355 | Checkable Deposits: $13,550
Excess Reserves: $3,645 |
Loans: $8,550 |
```

> The bank now has $3,645 in excess reserves, which can be lent out again.

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6. How much has the bank created with these transactions?

"Created" refers to money creation via lending.

- Initially, only $5,000 was deposited (real money).
- But through lending and redepositing, the total checkable deposits have grown to $13,550.
- So, new money created = Final deposits – Initial deposits
= $13,550 – $5,000 = $8,550

✔ Answer: $8,550

> This is the money multiplier effect in action.

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7. What is the maximum amount the bank can create?

The maximum potential money creation occurs when the process continues until all excess reserves are used up.

We use the money multiplier formula:

> Money Multiplier = 1 / Reserve Requirement = 1 / 0.10 = 10

So, maximum possible deposits = Initial deposit × Multiplier
= $5,000 × 10 = $50,000

But the question asks: What is the maximum amount the bank can create?

That means: how much new money (beyond initial $5,000) can be created?

→ $50,000 – $5,000 = $45,000

✔ Answer: $45,000

> This assumes the full multiplier process plays out across the banking system (though here we're only tracking one bank). In reality, the loaned money may end up in other banks, but in a simplified model, we assume it stays within the same bank or circulates back.

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✔ Final Answers:

6. How much has the bank created with these transactions?
👉 $8,550

7. What is the maximum amount the bank can create?
👉 $45,000

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Summary Table of T-Accounts (Final State):

```
ASSETS | LIABILITIES
----------------------------------|------------------------
Required Reserves: $1,355 | Checkable Deposits: $13,550
Excess Reserves: $3,645 |
Loans: $8,550 |
```

And the process could continue if the bank lends out the $3,645 in excess reserves, leading to further deposits and more lending — until the total reaches $50,000 in deposits.

Let me know if you'd like a visual chart or a breakdown of the full multiplier process!