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Unformatted text preview: This action by banks can also be illustrated using a balance sheet procedure. A balance sheet is an accounting tool that lists assets and liabilities. For a bank, reserves and loans serve as assets because they are money that the bank has, or has coming. Deposits, on the other hand, are liabilities; they are money that the bank owes. When creating a balance sheet, the assets are listed on the left and the liabilities are listed on the right. We can model the example of fractional reserve banking presented above using a balance sheet procedure. This is done in figure 1. To begin, list the assets and the liabilities of the bank after $1000 is deposited and $500 is loaned out. Remember that the reserve rate is 50%, so $500 must be held back in reserves and the rest may be loaned out. Given that this money is deposited into the bank again rather than stored in loaned out....
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- Fall '10