Questions: Bank of América Balance Sheet (in billions) Assets Liabilities Reserves 50 Deposits 500 Bonds 190 Loans Net Worth 40 Using the bank balance sheet above and assuming a reserve requirement of 10%, select all statement below that are true. If this bank makes a 2 billion loan to a large corporation, its "Net Worth" will go down by 2 billion. If this bank makes a 2 billion loan to a large corporation its "Reserves" will decrease by 2 billion In the event of a Bank Run and absent Fed intervention, this bank will not have sufficient reserves to meet depositors demands. If the Fed engages in an open market purchase of 25 billion, this bank will be able to increase "Loans" by 22.5 billion. If the Fed engages in an open market sale of 50 billion, the net worth of this bank will not change.

Let's analyze each statement based on the given balance sheet and the reserve requirement.

• Assets:
  • Reserves: $50 billion
  • Bonds: $190 billion
  • Loans: Not specified directly, but we can infer it from the total assets and liabilities.
• Liabilities:
  • Deposits: $500 billion
  • Net Worth: $40 billion

• The reserve requirement is 10%, meaning the bank must hold 10% of its deposits as reserves.
• Required reserves = 10% of $500 billion = $50 billion

1. If this bank makes a $2 billion loan to a large corporation, its "Net Worth" will go down by $2 billion.

   • False. Making a loan does not affect the net worth directly. The loan will decrease reserves and increase loans on the asset side, but net worth remains unchanged.

2. If this bank makes a $2 billion loan to a large corporation, its "Reserves" will decrease by $2 billion.

   • True. When the bank makes a loan, it uses its reserves. Therefore, reserves will decrease by the amount of the loan, which is $2 billion.

3. In the event of a Bank Run and absent Fed intervention, this bank will not have sufficient reserves to meet depositors' demands.

   • True. The bank has $50 billion in reserves, which is exactly the required amount. In a bank run, depositors may demand more than $50 billion, and the bank will not have sufficient reserves to meet these demands.

4. If the Fed engages in an open market purchase of $25 billion, this bank will be able to increase "Loans" by $22.5 billion.

   • True. An open market purchase by the Fed increases the bank's reserves. If the Fed buys $25 billion worth of securities, the bank's reserves increase by $25 billion. With a 10% reserve requirement, the bank can lend out 90% of the new reserves, which is $22.5 billion.

5. If the Fed engages in an open market sale of $50 billion, the net worth of this bank will not change.

   • True. An open market sale by the Fed decreases the bank's reserves. However, this transaction does not affect the bank's net worth directly. Net worth is the difference between total assets and total liabilities, and this remains unchanged by the sale of assets.

• The true statements are:
  • If this bank makes a $2 billion loan to a large corporation, its "Reserves" will decrease by $2 billion.
  • In the event of a Bank Run and absent Fed intervention, this bank will not have sufficient reserves to meet depositors' demands.
  • If the Fed engages in an open market purchase of $25 billion, this bank will be able to increase "Loans" by $22.5 billion.
  • If the Fed engages in an open market sale of $50 billion, the net worth of this bank will not change.