Question

QUESTION 3 Suppose that initially a bank has an excess reserves of $600 and the required reserve is 20%. Then Andy deposits 51200 into his checking account, and the bank lends $500 to Molly. The bank can lend additional:

Answer 1

Answer= $1060

Excess reserves = $600

Amount deposited by Andy = $1200

Required reserve ratio= 20% = 0.2

So, the bank has to keep 20% of $1200 as reserves and it can lend the remaining.

So,bank has to keep 20%($1200) = $240 as reserves.

So, the Bank can lend $960.

Recall that the bank already has excess reserves of $600. These are the reserves that bank chose to hold but it is not mandatory. So, the bank can lend these $600 if it wishes to. So, the excess reserves of $600 are also available for lending.

So, total amount available for lending is $960+$600 = $1560.

It has lent $500 to Molly.

So, the amount that the bank can still lend is $1560-$500 = $1060.

So, the bank can lend an additional $1060.