Question

BC Bank has $165M in deposits on its balance sheet. The current reserve ratio is 10% of deposits. The bank has exactly enough reserves to meet the reserve requirement and it has zero excess reserves. Suppose that the Federal Reserve decreases the reserve ratio to 8% of deposits. The bank then loans out all of the excess reserves created by the Federal Reserve action. After the loans are made, all the funds are deposited back into the bank. After this first loan cycle, the bank chooses to again lend out all excess reserves. After the loans are made, all the funds are deposited back into the bank. This process repeats for a total of four loan cycles. At the end of the four loan cycles, how much does the bank have in excess reserves?

Answer 1

Starting point is $ 165 Mn	10% of Deposit	8% of Deposit		Deposit created after 10% Reserve	Deposit created after 8% Reserve		Incremental Reserve created because of change from 10% to 8% reserve
Loan Cycle 1	16.50	13.20		148.50	151.80		3.30
Loan Cycle 2	14.85	12.14		133.65	139.66		2.71
Loan Cycle 3	13.37	11.17		120.29	128.48		2.19
Loan Cycle 4	12.03	10.28					1.75
Total	56.74	46.80					9.95

So the Total Incremental Reserve with the Bank is $ 9.95 Mn.