Question

Assets                                                        Liabilities

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

Deposited at the Fed       $5,000

Loans                                 $95,000                               Capital    $4,000

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Total                                   $104,000                                      $104,000

The required reserve ratio on all deposits is 5%

1. What, if any, are the bank's excess reserves?
2. How much amount will this bank be able to lend out?
3. If there is no currency drain and all funds loaned out by this bank are deposited back in this bank, what are the bank's excess reserves, if any, after the new deposit has been made?
4. Answer part a, b, and c if the required reserve ratio is increased to 8%.
5. Assuming a 5% required reserve ratio and a $1000 deposit of cash by John into his checking account with the first bank, calculate initial change in his bank and the other banks in the country when there is no drain (all new loan amount is deposited with the bank):

Answer 1

Answer a: Required reserve= Total Deposits* Reserve ratio

Required reserve= $1,00,000*(0.05)= $5000

Excess reserve= Available reserve - Required reserve

Excess reserve= $9000-$5000= $4000

b : Maximum amount this bank has been lent out = $99000

c : Now new deposits of the bank = $104000

Required reserve= 1,04,000*(5/100)= $5200

Excess reserve = $9000-$5200= $3800

Maximum amount this bank has been lent out = $98800

d: If required reserve ratio= 8%

Required reserve = 1,00,000*(0.08)=$8000

Excess reserve= $9000-$8000= $1000

Maximum amount the bank should lent out = $96000

Now new deposits in the bank = $1,04,000

Required reserve=$1,04,000*( 0.08)= $8320

Excess reserve=$9000- $8320= $680

Maximum loan that has been lent out = $95680

E : New deposits = $101000

Required reserve= $101000 *(5/100)= $5050

Therefore, reserve has been increased by $50 and loan amount has been increased by $950