Question

Bank with 200 million in checkable deposits, $12 million in vault cash, and 9 million on deposits at the Federal Reserve. If the required reserve ratio is 10%, then what is maximum amount of money this bank can use for loans? (Answer is 1.0) HOW? (show work)

Answer 1

Answer

The maximum amount of money this bank can use for loans is the amount of excess reserves it is holding.

Total Reserves = Required reserves + Excess Reserves

Here, Total Reserves = vault cash amount + total deposits at the Federal Reserve

=> Total Reserves = 12 million + 9 million = 21 million

Required reserves = required reserve ratio * checkable deposits. Here, required reserve ratio = 10% = 0.10

=> Required reserves = 0.1*200 million = 20 million

Thus, Total Reserves = Required reserves + Excess Reserves

=> 21 million + 20 million + Excess reserves.

=> Excess reserves = 1 million.

Hence, The maximum amount of money this bank can use for loans is 1.0 million