Under assets if reserves is $40, loans is $80, securities is $100, property is $

Question

Under assets if reserves is $40, loans is $80, securities is $100, property is $200; and under liabilities and net worth , demand deposits is $200, capital stock is $120. All figures are in billions and assume that the required reserve ratio is 12.5%. Please give the answer of the following questions .

1. The maximum amount by which this commercial banking system can expand the supply of money by lending is?

2. If there is a deposit of $20 billion of new currency into checking accounts in the banking system , excess reserves will increase by?

Explanation / Answer

1. Required reserve ratio is 12.5% of demand deposits

= 12.5% of 200 = $ 25 billion

The commercial backing system has $ 40 billion as reserves

Hence , it has 40 - 25 = $ 15 billion in excess of required reserves

Hence, Maximum amount by which this commercial banking system can expand the supply of money by lending is $ 15 billion

2. If $ 20 billion is deposited into checking account , the deposits increase to 200 + 20 = $ 220 billion

Required reserve ratio = 12.5% of 220 = 27.5 billion

Hence the required reserve increases by 27.5 - 25 = $ 2.50 billion

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