Scenario 11-1 A Bank's Assets Consist of $500 000 in Total Reserves

question 96

Multiple Choice

Scenario 11-1
A bank's assets consist of $500 000 in total reserves, $1 600 000 in loans, and a building worth $1 200 000. Its liabilities and capital consist of $2 000 000 in demand deposits and $1 300 000 in capital.
-Refer to Scenario 11-1.If the desired reserve ratio is 10 percent,what is the level of the bank's excess reserves and how much money could the excess reserves be used to create in the banking system as a result?

• A)Excess reserves are $200 000 and could be used to create $2 000 000 in the banking system.
• B)Excess reserves are $300 000 and could be used to create $300 000 in the banking system.
• C)Excess reserves are $300 000 and could be used to create $3 000 000 in the banking system.
• D)Excess reserves are $200 000 and could be used to create $200 000 in the banking system.

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Definitions:

Depreciation

An accounting method used to allocate the cost of a tangible asset over its useful life.

Net Capital Spending

The total expenditure on physical assets less any asset sales, reflecting how much a company is investing in its physical assets.

CCA Rate

The annual depreciation rate used under the Canadian tax system to calculate depreciation expense for tax purposes on a depreciable asset.

CCA

An acronym that can stand for Capital Cost Allowance, which is a tax deduction for depreciable property in Canada.