Question

Consider the following balance sheet for one of the commercial banks. Assume the desired reserve ratio is 8% Assets Reserves Loans Buildings Other assets Liabilities and capital 2.500 2.500 Demand deposits 20.000 40,000 Saving deposits 30.000 10,000 Bank's capital 10.000 7.500 What is the amount of excess reserves? Select one: a $2,500 b. $500 O C. -$2,500 O d. -S500 e. None of the above cross out cross out cross out cross out cross out The correct answer is: None of the above Assets Reserves 2.500 Loans 40.000 Buildings 10,000 Other assets 7,500 Liabilities and capital Demand deposits 20.000 Saving deposits 30.000 Bank's capital 10,000 By what amount should this bank change its loans? cross out Select one: a. Expand by $2,500 b. Expand by $1,500 c. Contract by $2,500 d. Contract by $1,500 e. None of the above X cross out cross out cross out cross out The correct answer is: Contract by $1,500 Assets Reserves Loans Buildings Other assets Liabilities and capital 2,500 Demand deposits 20.000 40,000 Saving deposits 30,000 10,000 Bank's capital 10.000 7,500 Assume that all other banks in Canada have the same practice as this bank, what will be the eventual change in the money supply in the entire banking system? Select one: a. Expand by S37,500 b. Expand by S50,000 c. Contract by $18,750 d. Contract by S37,500 e none of the above cross out cross out cross out cross out cross out

Looking for clarification on how to do this question.

Answer 1

Total Deposits = 20000+30000=$50000

Reserve Requirement = 8%*50000=$4000

Hence Excess Reserves = Reserves - Required Reserves = 2500-4000=-$1500

Hence Answer is None of the Above (option e)

Since there is a shortage of Reserves by $1500, hence Loan should contract by $1500 to maintain required reserves. Hence option d is correct

If all Banks are following same practice, the total loan should contract by = 1500/8% = 1500/0.08 = $18750. Hence c is correct