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

Before the cheque is cleared, the bank's reserves are $40,000 (10% of $400,000). After the cheque is cleared, the bank must reduce its reserves by $14,000 (15% of $14,000), leaving the bank with $26,000 in reserves. Demand deposits will be reduced by $14,000, leaving demand deposits of $106,000 ($120,000 - $14,000). Therefore, the correct answer is D.

The Following Balance Sheet Is for the First National Bank