Question

Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5%, and...

  1. Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5%, and excess reserves are $30 billion. Assume there is no bank capital. How much money is being loaned out?

    A.

    $270 billion
    B.

    $300 billion
    C.

    $330 billion
    D.

    $5,100 billion
    E.

    $5,400 billion
    F.

    $6,000 billion
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Answer #1

Answer : The answer is option D : $5,100 billion.

Required reserve amount = Reserve - Excess reserve = 300 - 30 =$270 billion.

The formula of required reserve is,

Required reserve = Deposit * Required reserve ratio

=> 270 = Deposit * 5%

=> 270 / 5% = Deposit

=> 270 / 0.05 = Deposit

=> Deposit = $5,400 billion

As the bank has zero capital hence the loaned out will be done from the deposited amount only. So,

Loaned out = Deposit - Bank's current reserve = 5,400 - 300 = $5,100 billion.

So, here the loaned out money is $5,100 billion. Hence except option D other options are not correct. Therefore, option D is the correct answer.

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