Question

The Bank of Your Class has the following balance sheet.

                     Assets                                                        Liabilities

____________________________________________________________________

Cash (reserves)                $4,000                                Deposits $100,000

Deposited at the Fed       $5,000

Loans                                 $91,000

______________________________________________________________________

Total                                   $100,000                                      $100,000

The required reserve ratio on all deposits is 5%

1. What, if any, are the bank's excess reserves?
2. How much new amount of loan will this bank be able to create?
3. How much new amount of loan will the entire banking system (all bank) be able to create?
4. Answer part a, b, and c if the required reserve ratio is increased to 8%.

Answer 1

• Loans = 91000, the ratio = 91000/100000 = 91% whereas Reserve Ratio is 9%(The left over after loans). This means that the firm is holding excess reserves to the tune of 4% (The reserve ratio is 5% and bank is holding 9% which is 4% in excess) which equals $4000.
• The new loans that the bank can create will be = $4000
• The new loans that the bank can create (for the entire banking system)= 1/0.05*4000 = 80000 (1/RR*Excess Reserves)

1. Loans = 91000, the ratio = 91000/100000 = 91% whereas Reserve Ratio is 9%(The left over after loans). This means that the firm is holding excess reserves to the tune of 1% (The reserve ratio is 8% and bank is holding 9% which is 1% in excess) which equals $1000.
2. The new loans that the bank can create will be = $1000
3. The new loans that the bank can create (for the entire banking system)= 1/0.05*1000 = 20000 (1/RR*Excess Reserves)