Question

1. Now, suppose that Humongous National loans the amount that you found in part b) to Ronaldinho Gaúcho.

Fill out the blanks in the Humongous National Bank’s T-account to reflect this transaction. Show your calculation.

Answer:                                                                                                                                (4 points)

Humongous National’s T-account:

Assets                                                                               Liabilities__

TR=   $3,080                                                                              D =  $3.080

            RR = $369.60

                                                 

            ER = $2,710.40

        

2. As a result of this transaction, can Humongous National continue loaning out money using Leo Messi’s initial deposit of $3,500?

Answer:  (circle the correct answer)                                                                                  (3 points)

YES    NO

I have the T-Chart filled out, I just need an explanation on the YES/NO question. Thanks

Answer 1

Given the data provided in the question, the following observations can be made:

There was an initial deposit of $3500, and banks are supposed to maintain a certain amount of reserves.

After the initial round of deposits and loans, the bank is now left with deposits worth $3080, and required reserves worth $369.60. Given the data already filled in the T-account, the required reserve rate is found out as 12%.

If this is the case, the initial amount that the bank has given as loans, i.e., $3080, is the maximum that could have been loaned out from a deposit of $3500.

Now, in the subsequent round of loans, the bank can only loan out $(3080 - 369.60) = $2710.4

Now, though the T-account mentions this as excess reserves (ER), it is also actually the maximum possible amount that can be given out as loans.

Therefore, to answer the question,

NO, the bank cannot continue to loan out money from $3500, without looking at the reserve requirements. This was already done in the first stage, when $3080 was loaned out from $3500.

With every stage of loaning out, there is a 12% reduction in the next stage.

The Humongous National Bank will now have to rely on further deposits (from anyone), if it wants to lend out more money.