Question

The table shows the balance sheet of a banking system? (aggregated over all? banks). The desired reserve ratio on all deposits is 2 percent. There is no currency drain. What is the quantity of loans and the quantity of total deposits when the banks have no excess? reserves? ?>>> Answer to 2 decimal places. The total quantity of loans after the banks have lent all their excess reserves is ??

Assets Liabilities ??? (millions of? dollars) Reserves at the Fed 20 , Checkable deposits 115 ,Cash in vault 55 ,Savings deposits 80 ,Securities 55 ,Loans 115

Answer 1

Answer:-

Here,

Total Demand Deposit = Checkable Deposit + Savings Deposit

Total Demand Deposit = 115 + 80 = 195

Required Reserve = ( Reserve Ratio ) x (Total Demand Deposit)

Required Reserve = ( 0.02 ) x ( 195 )

Required Reserve = 3.9 ----------------------------- A

Now,

Total Liquid Reserve = Reserve in the Fed + Cash in Vault

Total Liquid Reserve = 20 + 55

Total Liquid Reserve = 65 -------------------------------B

We know that, before giving out the loans,

Excess Reserve = Total Reserve - Required Reserve

from A and B, we get:

Excess Reserve = 65 - 3.9

Excess Reserve = 61.1 ---------------------------------- C

Now, all the excess reserve is used to give out the loans. And total new loans which can be given out is as follows:

New Loans = Excess Reserves x Money Multiplier

Also,

Money Multiplier = 1/(Reserve Ratio)

Money Multiplier = 1/(0.02)

Money Multiplier = 50 ----------------------------------- D

Hence, from C and D above, we get:

New Loans = (61.1) x (50)

New Loans = 3055 Million

Now, from the balance sheet, we already know that bank has old(previous) Loan of 115 Million

So,

Total Loan = New Loan + Old Loan + Previous Loan

Total Loan = 3055 + 115

Total Loan = 3170 Million

Also, the new loans will be deposited to a bank as well. Hence,

Total Deposit = New Loans + Previous Deposits

Total Deposit = 3055 + (115 + 80)

Total Deposit = 3055 + 195

Total Deposit = 3250 Million

Hope this helps.