Joe has never trusted banks and always kept his money in cash. Joe pulls out his

Question

Joe has never trusted banks and always kept his money in cash. Joe pulls out his money jar, discovers that it has $20,000 in it, and decides it is unsafe to keep that much cash. Joe stops at the Local National Bank the following day, opens a checking account, and deposits the $20,000.

Assume that all banks in the banking system have a 10% reserve requirement. Further, assume that all banks in the banking system are fully loaned up both before and after Joe makes his deposit. Based on the Multiple Expansion of Bank Deposits concept, answer the following:

1. By what amount will total lendable deposits in the banking system increase after the initial deposit?
2. By what amount will new loans in the banking system increase given a monetary multiplier of 10 ( 1/.1)?
3. By what amount will reserves in the banking system increase after the initial deposit?

In addition, consider any factors that are not included in your calculations and might affect the amount of expansion if they were considered.

Explanation / Answer

Assuming a 10% reserve requiremen, that means 10% of deposits are to be kept in reserve. so the answers are:
Q 1:

The increase in lendable deposit =
total deposit - reserve amount
=20000 - 20000 * 10%
=18000 $

Q2:
reserve ratio = 10
increase in lending amount = 10 times increase in reserve
= 10 * 2000 = 20000 $

Q3:
The increase in reserves in the banking system=
10 % of deposit
= 10 % * 20000 = 2000 $

The factors that may influnce = repo rate, inflation
(but the calculations dont need these)

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.