Question

4)  

Assets	Liabilities
RR $10	Dd $100
Bonds $90

a. A deposit of $50 into this bank would do what to reserves, both required and excess?

b. The $50 deposit would enable this bank to make a maximum loan of how much?

c. This deposit of $50 would enable the banking system to increase loans by how much?

d. What happens to the money supply when a loan is repaid?

Answer 1

Here required reserve(RR) = 10 and demand deposit(DD) = 100

So, reserve ratio = (10/100)*100 = 10%

a) IF a deposit of $50 so the required reserve ratio will increase by (50*10%=5) $5 means now

RR = 10+ 5 = $15

And rest amount is kept as excess reserve = 50-5 = $45

So RR increase by $5 and

Excess reserve increase by $45

b) The $50 deposit would enable this bank to make a maximum loan of $45 ( as excess reserve = $45) so bank can make a maximum loan equal to the excess reserve of $45

c) This deposit of $50 would enable the banking system to increase loans by= excess reseve * multiplier

Multiplier = 1/RR = 1/0.1 = 10

So, banking system increase loan by $45*10 = $450

d) money supply will decrease

Explanation:

When a bank lends money or give loan, it creates money while when loan is repaid that money is destroyed because now that money goes from circulation or demand deposit to being held as reserves in a bank. And we know that reserves are not counted as part of the money supply.