Question

In December 1994, a man in Ohio decided to deposit all of the 8 million pennies...

In December 1994, a man in Ohio decided to deposit all of the 8 million pennies he had been saving for nearly 65 years. (His deposit weighed over 48,000 pounds!) With a reserve requirement of 20 percent, how did his deposit change the lending capacity of:
a. his bank?
b. the banking system?

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Answer #1

Since, 1 penny= $0.01,

8000000 pennies= $(8000000×0.01)=$80000

a) Amount of this deposit which his bank has to keep has required Reserves= 0.2× $80000= $16000

Amount of this Deposit which this bank can lend= $80000–$16000= $64000.

His deposit increased the lending capacity of his bank by $64000.

b) Increase in the lending capacity of banking system due to his Deposit= (100/20)×80000= $400000

His deposit increased the lending capacity of the banking system by $400000

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