Question

Imagine that Bellatrix deposits $10,000 of currency into her checking account deposit at Gringotts Wizarding Bank (commercial bank in Hogsmeade) and that the required reserve ratio is 20%.

1. (a) As a result of Bella’s deposit, Gringotts’s cash reserves increase by: (a) $ 2,000

   (b) $ 8,000 (c) $10,000 (d) $50,000

2. (b) As a result of Bella’s deposit, Gringotts’s required reserves increase by (a) $ 2,000

   (b) $ 8,000 (c) $10,000 (d) $50,000

3. (c) As a result of Bella’s deposit, Gringotts’s excess reserves increase by (a) $ 2,000

   (b) $ 8,000 (c) $10,000 (d) $50,000

4. (d) As a result of Bella’s deposit, Gringotts can make a maximum loan of (a) $ 2,000

   (b) $ 8,000 (c) $10,000 (d) $50,000

5. (e) As a result of Bella’s deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

   (a) $ 2,000 (b) $ 8,000 (c) $10,000 (d) $50,000

Answer 1

(Question a) Option (c)

Increase in reserve = Increase in deposit

(Question b) Option (a)

Increase in required reserve = Increase in deposit x Reserve ratio = 10,000 x 20% = 2,000

(Question c) Option (b)

Increase in excess reserve = Increase in deposit - Increase in required reserve = 10,000 - 2,000 = 8,000

(Question d) Option (b)

Maximum increase in loan = Increase in excess reserves

(Question e) Option (d)

Maximum Increase in deposit = (Initial Increase in deposit / Reserve ratio) = 10,000 / 0.2 = 50,000