Question

Assets		Liabilities + Net Worth
Reserves	$120,000	Checkable Deposits	$300,000
Loans	140,000	Stock Shares	200,000
Securities	40,000
Property	200,000

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans and deposits could have been expanded by a maximum of:

• $40,000.

• $100,000.

• $200,000.

• $300,000.

Answer 1

Solution:-

Money Multiplier = 1 / Required Reserve Ratio

                           = 1 / 0.20

                            = 5

Reserve requirement will = 20% of 300,000 = 60,000

Excess Reserves = Reserve – Required Reserve

                             = 120,000 – 60,000

                             = 60,000

Expansion in loans and deposits will be = excess reserves X money multiplier

                                                               = $60,000 x 5

                                                               = $300,000.

So the answer is Option (4) $300,000