Question

In: Economics

Assets Liabilities Cash $ 6,000 Deposited with the Fed

Assets

Liabilities

Cash $ 6,000

Deposited with the Fed $ 4,000

Loans $ 140,000

Deposits $ 90,000

Capital $ 60,000

Total $ 150,000

The required reserve ratio on all deposits is 8%

a. What, if any, are this bank's excess reserves?

b. How much new amount of loan will this bank be able to create because of the excess reserves?

c. How much new amount of loan will the entire banking system be able to create because of this excess reserves?

d. Answer part a, b and c if the required reserve ratio is changed to 5%.

Expert Solution

If required reserve ratio is 8%

Required reserve = 90,000 * 0.08 = $7,200

a) Excess reserve = Total reserves - Required reserves = (6,000 + 4,000) - 7,200 = $2,800.

b) The new amount of loan this bank will be able to create because of the excess reserves is $2,800.

c) Money multiplier = 1 / Required reserve ratio = 1 / 0.08 = 12.5

The new amount of loan the entire banking system will be able to create because of this excess reserves = $2,800 * 12.5 = $35,500.

d) If required reserve ratio is 5%

Required reserve = 90,000 * 0.05 = $4,500

Excess reserve = Total reserves - Required reserves = (6,000 + 4,000) - 4,500 = $5,500.

The new amount of loan this bank will be able to create because of the excess reserves is $5,500.

Money multiplier = 1 / Required reserve ratio = 1 / 0.05 = 20

The new amount of loan the entire banking system will be able to create because of this excess reserves = $5,500 * 20 = $110,000.

Rahul Sunny answered 2 years ago

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