The balance sheet below is for the First Federal Bank. Assume the required reser

Question

The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent. Liabilities +Net Worth Reserves $100,000 Checkable Deposits $300,000 140,000 Stock Shares Securities 60,000 Property 200,000 Refer to the above information. If the original bank balance sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of: (Hint: Since we are looking at the whole banking system the excess reserves of all the banks can be lent, creating new deposits and new lending in the banking system. In short we will have the monetary multiplier effect. To answer this question multiply the excess reserves by the multiplier.) 1) $40,000o o 2) $100,000 3) $200,000 4) $300.000 888 F #7 7 8 9 0

Explanation / Answer

A. Option 3 , $200,000.

First of all we will calculate the money multiplier which is

= 1 / required reserve ratio = 1 / 0.20 = 5

Now we know that reserve requirement is 20% of checkable deposits. The amount of checkable deposits is $300,000. So reserve requirement will be

= 20% of 300,000 = $60000.

Now excess reserves will be = Reserves held - required reserves = 100000 - 60000 = $40000

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

= 40000 x 5 = $200,000.

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