Question

In: Economics

Assume that a bank has checkable deposits of $990, loans of value $813 and reserves at...

Assume that a bank has checkable deposits of $990, loans of value $813 and reserves at $177. The bank then receives a new deposit of $224. The required reserve ratio is 11%. After the new deposit but prior to asset transformation, the bank has excess reserves of _____, and then after asset transformation, so that excess reserves go to zero, the bank's total value of loans is now _____ .

1) 267.46 , 1080.46

2) 267.46 , 1014.54

3) 255.14 , 1080.46

4) 255.14 , 1014.54

Solutions

Expert Solution

We have,

Reserve Ratio = 11% = 0.11

Initially before new deposits,

Checkable deposits = $ 990

Reserves = $ 177

Required Reserves (RR₁) = Reserve Ratio * Checkable deposits

= 0.11 * $990 = $108.9

Excess Reserves (ER₁) = Reserves - Required Reserves

= $177 - $108.9 = $68.1

After new deposit of $224 but prior to asset transformation,

Required reserves from new deposit = 0.11 * $224

= $24.64

Excess Reserves from New Deposits (ER₂) = New Deposit - Required Reserves from new deposits

= $224 - $24.64

= $199.36

Hence, total excess reserves after the new deposit of $224 but prior to asset transformation is ER₁ + ER₂ = $68.1 + $199.36 = $267.46.

After asset transformation so that excess reserves go to zero,

Final deposits = $990 + $224 = $1214

Final Required Reserves = 0.11* $1214 = $133.54

Final Loan Value = Final Deposits - Final Required Reserves

= $1214 - $133.54

= $1080.46

Hence, correct answer of this question is option (1).

Rahul Sunny answered 1 year ago

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