If a bank experiences a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, which balance sheet would the bank rather have initially: Balance sheet A or balance sheet B? Why? Balance Sheet A Assets Liabilities Reserves $75 million Deposits $500 million Loans $525 million Capital $100 million Balance Sheet B Assets Liabilities Reserves $100 million Deposits $500 million Loans $500 million Capital $100 million

Balance Sheet B

Explanation:

Given Data:

Balance Sheet A

Assets                                          Liabilities

Reserves-- $75 million                Deposits --$500 million

Loans-- $525 million                   Capital --$100 million

Balance Sheet B

Assets                                          Liabilities

Reserves-- $100 million                Deposits-- $500 million

Loans--- $500 million                     Capital-- $100 million

Representing each balance sheet as follows:

Balance Sheet A

Assets           Amount                      Liabilities           Amount

Reserves      $75 million                  Deposits            $500 million

Loans            $525 million               Capital                $100 million

Total:               $600                                                    $600 million

Balance Sheet B

Assets            Amount                   Liabilities              Amount

Reserves        $100 million            Deposits              $500 million

Loans              $500 million           Capital                 $100 million

Total:               $600 million                                       $600 million

When there is a deposit of $50 million, the bank would be better off with balance sheet B because it initially has a higher amount of reserves. An outflow of $50 million would reduce the amount of reserves by $50 million since the bank has to maintain certain amount of required reserves held as assets to meet this requirement.

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