Question

Mighty Bank

• Customer deposits = $5,000

• Deposits at the Bank of Canada = $300

• Cash on hand = $400 • Desired reserve coefficient = 10%

23. Mighty Bank’s excess reserves are

a) $200 b) $250 c) $300 d) $400

24. What is the maximum dollar value of new loans that Mighty Bank should grant?

a) $0 b) $200 c) $700 d) $5,000 25.

If Mighty Bank was a monopoly bank (it had no competitors in the region and e- banking was not an option), what is the maximum value of loans that Mighty Bank could grant to its customers? a) $200 b) $700 c) $2,000 d) $7,000

Answer 1

23.

Given,

For Mighty Bank:

Customer Deposits = $5,000

Deposits at the Bank of Canada = $300

Cash on hand = $400

Desired reserve coefficient = 10% = 0.10

Required Reserves = Desired reserve coefficient * Customer deposits held by the bank = 0.10 * $5,000 = $500

Actual Reserves = Deposits at the Bank of Canada + Cash on hand = $300 + $400 = $700

Excess Reserves = Actual Reserves - Required Reserves = $700 - $500 = $200

Ans: a) $200

24. Mighty bank can loan out the excess reserves. Therefore, the maximum valueof new loans that Mighty Bank should grant = Excess Reserves = $200

Ans: b) $200

25. Money multiplier = 1/Desired Reserve Ratio = 1/0.10 = 10

Therefore, if the Mighty Bank is the only bank, then the maximum loans that the Mighty Bank could grant its customers = Money Mltiplier * Excess Reserves = 10 * $200 = $2,000

Ans: c) $2,000