1.) Suppose that a bank has $60,000 in checkable account with the required ratio

ID: 1110340 • Letter: 1

Question

1.) Suppose that a bank has $60,000 in checkable account with the required ratio of 10%. If this bank is holding $4,000 in excess reserve:

a. What are the reserves?

b. If RRR is changed from 10% to 8%, what are its excess reserves?

c. How much new loan can this bank create when RRR is 8%

d. How much new loan can the entire banking system create when RRR is 8%?

2.) Suppose a bank gets a new deposit of $ 80,000 of new money cash. This bank creates a new loan of $64,000.

a. What is the required reserve ratio?

b. How much new loan will the entire banking system be able to create?

Can someone please explain this step by step
Thank you

1-Reserve is the mininmumamunt of deposits required to be maintained by banks as prescribed by government.

a-Required Reserves = m x Demand Deposits

M=10% i.e required ratio

So,Required Reserves =10/100*$60000=6000$

Reserves = Excess Reserves+Required Reserves =$4000+$6000=$10000

b-If RR=8%

Required Reserves = m x Demand Deposits

M=8% i.e required ratio

Required Reserves =8/100*$60000=4800$

Excess Reserves=Reserves-Required reseves=$10000-$4800=$5200

c-For calculating new loan multiplier effect is used i.e

Money multiplier = 1/required reserve ratio = 1/8% = 12.5%

So,New loan this bank can create =12.5%*$4000=$500

d-New loan the entire banking system should create when RRR is 8% So the money multiplier calculated above was 12.5%

New loan of entire banking will be=$60000*12.5%=$7500

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