Question

The T-Account for a Bank is given below. The reserve requirement is 5%.

Assets	Liabilities
$100,000 Reserves	$500,000 demand deposits
$350,000 loans
$50,000 treasury bonds
TOTAL: $500,000	TOTAL: $500,000

How much in new loans can this bank make if the Central Bank buys $1000 worth of treasury bonds from this bank?

Answer 1

Before the Central Bank's buying the bonds:

Reserves = $100,000

Treasury bonds = $50,000

Demand deposits = $500,000

After the Central Bank buys $1,000 worth bonds:

Reserves = $101,000

Treasury bonds = $49,000

Demand deposits = $500,000

Required reserve ratio = 5%

Required reserves = Required reserve ratio * Deposits = 5% * $500,000 = $25,000

Excess reserves = Actual reserves - Required reserves = $101,000 - $25,000 = $76,000

The given bank can make new loans worth equal to its excess reserves i.e., $76,000

Ans: $76,000