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Suppose a bank's balance sheet looks as follows: Assets Liabilities Reserves $690 Deposits $6,000 Loans $5,310 Assume banks are required to hold reserves equal to 10 percent of deposits
Suppose a bank's balance sheet looks as follows:
| Assets | Liabilities | ||
|---|---|---|---|
| Reserves | $690 | Deposits | $6,000 |
| Loans | $5,310 |
Assume banks are required to hold reserves equal to 10 percent of deposits.
Instructions: Enter your responses as a whole number.
(a) How much excess reserves does the bank hold?
$
(b) How much more can this bank lend?
$
Expert Solution
a. If the banks deposits are $6,000 and the required reserve ratio is 0.10 then the amount of reserves that the bank has to keep in cash is $6,000 * 0.1 = $600. This means that the required reserves mandated by the central bank are $600. If the bank has $690 in reserves then the bank is holding an extra $90 in reserves.
b. If the bank is holding an extra $90 in reserves the bank is allowed and able to give out another $90 in loans. The amount of lending capable is equal to the amount of excess reserves.
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