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why and how? Bank A has an increase in deposits of $20 million dollars and all...

why and how? Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10 percent. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?
38)
A) $60.00 million B) $48.00 million C) $57.10 million D) $56.33 million E) $54.20 million

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Answer #1

Ans: E 54.20 million

Increase in deposits of Bank A = $20 million

Bank needs to keep 10% of this increase in deposits as reserves because of reserve requirements. It will loan out the remaining amount.

Amount loaned out = 20*0.9 = $18million

This amount winds up deposited in Bank B.

Therefore,

Increase in deposits of Bank B = $18 million

Bank needs to keep 10% of this increase in deposits as reserves because of reserve requirements. It will loan out the remaining amount.

Amount loaned out = 18*0.9 = $16.2million

This amount winds up deposited in Bank C.

Therefore, increase in deposits in Bank C = $16.2 million

Total increase in deposits from three banks = 20 + 18 + 16.2 = $54.2 million

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