Question

Balance sheet of the Bank of your class

Assets

Liabilities

Cash $ 10,000

Loans $ 140,000

Deposits $ 90,000

Capital $ 60,000

Total $ 150,000

Total $ 150,000

The required reserve ratio on all deposits is 10%

a. What, if any, are this bank's excess reserves?

b. How much new amount of loan will this bank be able to create because of the excess reserves?

c. How much new amount of loan will the entire banking system be able to create because of the excess reserves?

d. Answer part a,b and c if the required reserve ratio is changed to 6%.

e. How much new amount of loan will this bank be able to create if some one deposited $4,000 in cash when the RRR is 6%?

Answer 1

ANSWER :

(A). Reserve ratio = 10%; Deposits = $90,000; Cash held = $10,000

Cash to be maintained according to reserve ratio = 10% of $90,000 = $9,000

            Excess reserve = $1,000 (10,000 - 9,000)

(B). New amount of loan this bank be able to create = $1,000x0.09 = $900

(C). When reserve ratio is changed to 6%

Cash to be maintained at 6% reserve ratio = $90,000x0.06 = $5,400

Excess reserve = $10,000 - $5,400 = $4,600

New amount of loan this bank be able to create = $4,600 x 0.94 = $4,324

(D). If someone deposited $4,000 and RR is 6%

New amount of loan this bank be able to lend = $4,000x0.94 = $3,760.