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A simple definition: a tool for analyzing a business's financial position through liabilities & assets.

What does it look like?🧐

  • this T-Account is for an individual business 
  • we always put assets on the left & liabilities on the right

A bank can also have a T-Account, & it looks like this.⬇️(They are also called Bank Balance Sheets)

  • notice we have different terms than of an individual's T-account that corresponds to a bank's situation: loans, reserves, & deposits.
  • There are 2 types of reserves - required and excess
  • Required Reserves - The legal amount of deposits a bank MUST reserve, determined by the Fed - cannot be loaned out
  • Excess Reserves - Any extra money reserved - can be loaned out

Practice Problem:

(a) What is the reserve requirement?
(b) If David deposits $10,000 into the bank, how much will the money supply initially increase?
(c) What is the maximum increase in the money supply after David's $10,000 deposit?

How do we utilize a T-Account?

  • figuring out how much a bank can loan out or keep in reserves & therefore figuring overall how much the money supply has increased
  • figuring out an individuals financial standing to find profits & losses 

Check out this video to see how we work with a bank balance sheet! It's an important concept that shows up on both the MC & FRQ portion of the AP exam.

Answer to Practice Problem:
(a): The reserve requirement is 10%. Deposits are $1,000,000 and of that only $100,000, or 10% are reserved.

(b): If David deposits $10,000, the money supply initially does not change! The money only changes composition.

(c): Since we have a R.R. of 10%, the money multiplier is 1/0.1 = 10. 1000 dollars are required to be reserved, meaning 9000 can be loaned out. 9000 * 10 = $90,000 is the maximum increase in the money supply.

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