Quiz 32: Money, Banking, and Financial Institutions

Business

Remember that a balance sheet must satisfy the following equation: img Thus, if the assets of the bank went up by $100,000, this must mean that liabilities plus net worth also went up by $100,000. Since we are given that net worth went up by $20,000, we have: img This means that liabilities must have increased by $80,000.

An Asset and a Liability are on different sides of a bank's balance sheet. Assets are things that are owned by the bank or owed to the bank, and liabilities are claims of non-owners of the bank against the firm's assets. In other words, liabilities are what the bank owes to people who do not own the bank. Assets, liabilities, and net worth are related through the simple expression: img . This expression simply says that the assets of a bank must equal to what it owes to non-owners plus what it owes to owners, or the net worth. The net worth, in other words, is just the difference between a bank's assets and its liabilities. This is how much the bank is worth, in a sense. A balance sheet must balance because of the expression listed above ( img ), which says that every dollar increase in assets must be offset by a dollar increase in liabilities and net worth. By definition, the net worth of a bank is the difference between the assets and liabilities, therefore, liabilities plus net worth must always equal a bank's assets. Assets of a bank include vault cash (the cash that a bank holds in its vault) and property, while the main claims on a bank include its stock shares (the money that came from people investing in the bank) and its checkable deposits (people putting money into the bank). Checkable deposits are claims on the bank because someone who deposits money into the bank is essence "lending" to the bank. The bank is expected to pay back the depositor whenever he or she demands it.

Required Reserve= 20/100 of $150,000= $30,000 National Bank of Commerce has $8000 excess reserve, Actual Reserve= Required Reserve + Excess Reserve = $30,000 + $8,000 = $38,000 The National Bank of Commerce has $38,000 actual reserves.

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