Question

2. (15 pt) The banking system has $8,000 in reserve, $22,000 in loans, and $30,000 in deposits. If the reserve requirement is 10%.

(a) (5 pt) What is the maximum amount of loans the banking system could make given the amount of $8,000 reserve held at the Fed?

(b) (5 pt) If the Fed lowers reserve requirement to 5%, what is the maximum amount of loans the banking system could make given the amount of $8,000 reserve held at the Fed?

(c) (5 pt) If the Fed increases reserve requirement to 20%, what is the maximum amount of loans the banking system could make given the amount of $8,000 reserve held at the Fed?

Answer 1

a.

Value of total Deposit = $30,000

Reserve requirement = 10%

value of reserve = $30,000 × 10%

= $3,000

Excess reserve = $8,000 - $3,000

= $5,000

Value of excess reserve is $5,000.

Maximum value of loan company can make = Total deposit - reserve requirement

= $30,000 - $3,000

= $27,000

Maximum value of loan company can make is $27,000.

b.

Value of total Deposit = $30,000

Reserve requirement = 5%

value of reserve = $30,000 × 5%

= $1,500

Maximum value of loan company can make = Total deposit - reserve requirement

= $30,000 - $1,500

= $28,500

Maximum value of loan company can make is $28,500.

c.

Value of total Deposit = $30,000

Reserve requirement = 20%

value of reserve = $30,000 × 20%

= $6,000

Maximum value of loan company can make = Total deposit - reserve requirement

= $30,000 - $6,000

= $24,000

Maximum value of loan company can make is $24,000.