Question

The Bank of Your Class has the following balance sheet.

                     Assets                                                        Liabilities

____________________________________________________________________

Cash (reserves)                $4,000                                Deposits $100,000

Deposited at the Fed       $5,000

Loans                                 $91,000

______________________________________________________________________

Total                                   $100,000                                      $100,000

The required reserve ratio on all deposits is 5%

a. What, if any, are the bank's excess reserves?

b. How much new amount of loan will this bank be able to create?

c. How much new amount of loan will the entire banking system (all bank) be able to create?

d. Answer part a, b, and c if the required reserve ratio is increased to 8%.

Try avoiding hand writing, Thanks!

Answer 1

If reserve requirement is 5%:

a.

Excess reserve is the excess of total over the required reserve.

Total reserve = Cash reserve + Deposit at Fed

                        = 4,000 + 5,000

                        = $9,000

Required reserve = Deposit × Required reserve rate

                                    = $100,000 × 5%

                                    = $5,000

Excess reserve = Total reserve – Required reserve

                        = 9,000 – 5,000

                        = $4,000 (Answer)

b.

The bank can able to create new loan by the amount of excess reserve.

Answer: $4,000

c.

New loan entirely = Excess reserve × (1/required reserve ratio)

                              = $4,000 × (1/0.05)

                              = $80,000 (Answer)

If reserve requirement is 8%:

a.

Excess reserve is the excess of total over the required reserve.

Total reserve = Cash reserve + Deposit at Fed

                        = 4,000 + 5,000

                        = $9,000

Required reserve = Deposit × Required reserve rate

                                    = $100,000 × 8%

                                    = $8,000

Excess reserve = Total reserve – Required reserve

                        = 9,000 – 8,000

                        = $1,000 (Answer)

b.

The bank can able to create new loan by the amount of excess reserve.

Answer: $1,000

c.

New loan entirely = Excess reserve × (1/required reserve ratio)

                              = $1,000 × (1/0.08)

                              = $12,500 (Answer)