The following balance sheet is for the First National Bank.Assume the desired reserve ratio is 15 percent. Refer to the above data.If a cheque for $14,000 is drawn and cleared against this bank, its reserves and demand deposits will be, respectively:
A)$50,000 and $120,000.
B)$50,000 and $106,000.
C)$36,000 and $120,000.
D)$36,000 and $106,000.

Question

The following balance sheet is for the First National Bank.Assume the desired reserve ratio is 15 percent.  Refer to the above data.If a cheque for $14,000 is drawn and cleared against this bank, its reserves and demand deposits will be, respectively:
A)$50,000 and $120,000. 
B)$50,000 and $106,000. 
C)$36,000 and $120,000. 
D)$36,000 and $106,000.

Quizplus · Accepted Answer

Using the desired reserve ratio of 15%, we can calculate the required reserves for this bank:

Required Reserves = 15% * $120,000 = $18,000

Before the cheque is cleared, the bank has $41,000 in reserves, which is more than the required reserves. Therefore, the bank can clear the cheque without any issues.

However, after the cheque is cleared, the bank's demand deposits will decrease by $14,000:

New Demand Deposits = $120,000 - $14,000 = $106,000

To maintain the desired reserve ratio, the bank must adjust its reserves:

New Reserves = $41,000 - $18,000 = $23,000

Therefore, after the cheque is cleared, the bank's reserves and demand deposits will be $23,000 and $106,000, respectively. The correct answer is D.

The Following Balance Sheet Is for the First National Bank