Question

The initial condition of the banking system is as follows: $150 billion in reserve, $1,350 billion in loans and investments, and $1,500 billion in deposits. The required reserve is 10%. The Fed buys $100 billion government securities using open market operation. What is the maximum amount of loans in the banking system as a result of such Fed operation?

Answer 1

Answer

Given: Reserve = $150 billion ; Loans = $1350 billion; Deposits = $1500 billion; Requred reserve (m) = 10%

Maximum possible amount of loans is the excess reserves a bank has to lend as loans

Required reserve = m x Demand deposits

=> .10 x 15000 = 150 billion

Excess reserve =Reserve - Required reserve = $150 - $150= 0

This shows that there is zero excess reserves with the bank and it is all loaned up which means bank has no funds to lend for loans.