People hold $400 million of bank deposits but no currency. Banks have made $380

Q: People hold $400 million of bank deposits but no currency. Banks have made $380

Correct option is (C). Initially, Reserves ($ million) = Deposits - Loans = 400 - 380 = 20 Since this is the amount of required reserves, Required reserves ratio (RR) = Reserves / Deposits = $20 million / $400 million = 0.05 = 5% When banks keep additional $10 million as (excess) reserves, Total increase in loans (excess reserves) ($ million) = 10 / 0.05 = 200

ID: 1101009 • Letter: P

Question

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy requirements. Subsequently, because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?

A) They fall $220 million

B) They fall $190 million (I believe this is correct? I have no idea how to work through the problem though...work would be great)

C) They rise $200 million

D) They rise $220 million

Explanation / Answer

Correct option is (C).

Initially, Reserves ($ million) = Deposits - Loans = 400 - 380 = 20

Since this is the amount of required reserves,

Required reserves ratio (RR) = Reserves / Deposits = $20 million / $400 million = 0.05 = 5%

When banks keep additional $10 million as (excess) reserves,

Total increase in loans (excess reserves) ($ million) = 10 / 0.05 = 200

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People hold $400 million of bank deposits but no currency. Banks have made $380

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