Question

If reserves in the banking system increase by $1$billion because the Fed lends $1$$1$billion to financial institutions, and checkable deposits increase by $9$billion, why isn’t the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for the banking system in equilibrium.

Short answer

The banking system remains unbalanced as it continues to have additional $100$million in reserves. extra reserves will be terminated until equilibrium is achieved with an additional $1$billion in verifiable deposits

Step-by-step solution

Concept Introduction

T-shape is made by the upward line down the center and the even line under "Resources" and "Liabilities," it is here and there called a T-account. The "T" in a T-account divides the resources of a firm, on the left, from its liabilities, on the right. Accountants use T accounts to prepare double entry system bookkeeping more comfortable to manage. A twofold section framework is an intricate accounting process where each passage has an additional a comparing section to an alternate record.

Explanation

The banking system might not be in equilibrium because there might be a gap between demand and supply of money. in this case Fed. bank might have issued more supply of money in the financial market. Now back to the equilibrium banks have to get this excess cash floating in the system. in the T account which is a double-entry system assets and liabilities should be balanced. Now banks will begin getting this cashback through marketing their bonds and securities in the market which will go under the credit side of banking systems.

Final answer

The banking system remains unbalanced as it continues to have additional $100$million in reserves. extra reserves will be terminated until equilibrium is achieved with an additional $1$billion in verifiable deposits