Exploring Economics
Exploring Economics
8th Edition
ISBN: 9781544336329
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
Question
Book Icon
Chapter 25, Problem 16P
To determine

(a)

To compute:

The amount of money the bank could lend if a bank had a reserve of $30,000 and demand deposits of $200,000.

Expert Solution
Check Mark

Answer to Problem 16P

The amount of money that could be lent if the bank faces the given required reserve is as shown below:

    10percent$180,000
    15 percent$170,000
    20percent$160,000

Explanation of Solution

Given information:

The bank had reservesof $30,000 and demand deposits of $200,000. The bank reserve ratio is 10%.

Calculation of required reserve:

  Requiredreserve=r×D=0.1×$200,000=$20,000

Calculation of excess reserve:

  Excessreserve=ActualreserveRequiredreserve=$30,000$20,000=$10,000

The assets and liability of the bank should be equal.

Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$200,000+$10,000=$30,000+LoansLoans=$210,000$30,000=$180,000

Similarly,

The bank had reservesof $30,000 and demand deposits of $200,000. The bank reserve ratio is 15%.

Calculation of required reserve:

  Requiredreserve=r×D=0.15×$200,000=$30,000

Calculation of excess reserve:

  Excessreserve=ActualreserveRequiredreserve=$30,000$30,000=$0

The assets and liability of the bank should be equal. Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$200,000+0=$30,000+LoansLoans=$200,000$30,000=$170,000

And

The bank had reservesof $30,000 and demand deposits of $200,000. The bank reserve ratio is 20%.

Calculation of required reserve:

  Requiredreserve=r×D=0.2×$200,000=$40,000

Calculation of excess reserve:

  Excessreserve=ActualreserveRequiredreserve=$30,000$40,000=$10,000

The assets and liability of the bank should be equal. Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$200,000+($10,000)=$30,000+LoansLoans=$190,000$30,000=$160,000

Economics Concept Introduction

Required reserve:

It refers to a certain amount of cash from the deposits that banks need to keep according to the guidelines of central bank.

Required reserve is calculated by,

  RR=r×D

Here, RR is required reserve, r is percentage of required reserve and D is the total amount in

deposits.

Excess reserve:

The holding of reserves in excess by the banks or financial institutions than what is required by the regulators, creditors or internal controls is termed as excess reserve or capital reserve.

  ER=CashReserveRequiredReserve

Money multiplier:

It calculates the potential amount of money a bank generates with each dollar of reserves.

  Moneymultiplier=1R

Where, R is required reserve.

To determine

(b)

To compute:

The additional dollar that can be lent out as a result of $40,000 deposit.

Expert Solution
Check Mark

Answer to Problem 16P

The additional dollar that can be lent out as a result of $40,000 deposit if the bank faces the given required reserve ratio is shown in the table below:

    10percent$176,000
    15percent$110,000
    20percent$152,000

Explanation of Solution

Given information:

The bank has reserve of $30,000 with new demand deposit of $240,000.

The bank must keep demand deposit with Fed of 10%.

The reserves with bank are $30,000 and demand deposits are $240,000. The bank reserve ratio is 10%.

Calculation of required reserve:

  Requiredreserve=r×D=0.1×$240,000=$24,000

Calculation of excess reserve:

  Excessreserve=ActualreserveRequiredreserve=$30,000$24,000=$6,000

The assets and liability of the bank should be equal. Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$200,000+$6,000=$30,000+LoansLoans=$206,000$30,000=$176,000

Therefore, bank can lend an amount of $176,000 with reserve ratio of 10%.

Similarly,

The reserves with bank are $30,000 and demand deposits are $240,000. The bank reserve ratio is 15%.

Calculation of required reserve:

  Requiredreserve=r×D=0.15×$240,000=$36,000

Calculation of excess reserve:-

  Excessreserve=ActualreserveRequiredreserve=$30,000$36,000=$6,000

The assets and liability of the bank should be equal. Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$240,000+($6,000)=$30,000+LoansLoans=$110,000

Therefore, bank can lend an amount of $110,000 with reserve ratio 15%.

And,

The reserves with bank are $30,000 and demand deposits are $240,000. The bank reserve ratio is 15%.

Calculation of required reserve:

  Requiredreserve=r×D=0.2×$240,000=$48,000

Calculation of excess reserve:-

  Excessreserve=ActualreserveRequiredreserve=$30,000$48,000=$18,000

The assets and liability of the bank should be equal. Therefore,

  Demanddepoists+Excessreserve=Reserve+Loans$240,000+($48,000)=$30,000+LoansLoans=$182,000$30,000=$152,000

Therefore, bank can lend an amount of $152,000 with reserve ratio 20%.

Economics Concept Introduction

Required reserve:

It refers to a certain amount of cash from the deposits that banks need to keep according to the guidelines of central bank.

Required reserve is calculated by,

  RR=r×D

Here, RR is required reserve, r is percentage of required reserve and D is the total amount in

deposits.

Excess reserve:

The holding of reserves in excess by the banks or financial institutions than what is required by the regulators, creditors or internal controls is termed as excess reserve or capital reserve.

  ER=CashReserveRequiredReserve

Money multiplier:

It calculates the potential amount of money a bank generates with each dollar of reserves.

  Moneymultiplier=1R

Where, R is required reserve.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Click on the link to study the Economics in the News. Then answer the following questions. 120- 118- 3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in 2016 and 2017 that brought the economy to its situation in mid-2017. The graph shows the U.S. economy in the second quarter of 2016. Draw and label the long-run aggregate supply curve in 2017. Draw and label the aggregate demand curve in 2017. Draw a point at the short-run macroeconomic equilibrium in the second quarter of 2017. 116- 114- ☑--- Price level (GDP deflator, 2009=100) LAS 16 112- 110- 108- 106- 104- 102- $16.7 100- 16.6 16.7 16.8 16.9 17.0 SAS 16 = SAS17 AD 16 17.1 17.2 17.3 Real GDP (trillions of 2009 dollars) >>> Draw only the objects specified in the question. LV ☑
Price level (GDP deflator, 2009=100) Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence The U.S. Federal Reserve raised interest rates on Wednesday. The rate rise was the second in three months. This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These gains are accompanied by a rising inflation rate. 140- 130- Source: Reuters, March 15, 2017 Describe the process by which the Fed's action reported in the news clip flows through the economy. 120- ... 110- LAS SAS → ☑ When the Fed raises the interest rate, A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls B. aggregate demand increases and real GDP increases C. aggregate demand decreases and the price level falls D. short-run aggregate supply increases and the price level falls The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve. Draw the AD curve to illustrate the state of the economy…
Price level (GDP deflator, 2009=100) Millennials Are Starting to Spend More Millennials, who spend an average of $85 a day, are expected to spend at a higher rate in the next fifteen years. Only 37 percent of Americans report higher spending today than a year ago, while 42 percent of millennials say they are spending more. Millennials are spending more on rent or mortgages and leisure activities than they were spending a year ago. 140- 130- Source: Business Journal, May 25, 2016 120- Describe the macroeconomic equilibrium after the change in spending by millennials. If the economy had been at a below full-employment equilibrium, then the economy will A. move to an above full-employment equilibrium with real GDP less than potential GDP B. move to a full-employment equilibrium as short-run aggregate supply increases at the same time 'C. move to a full-employment equilibrium and equilibrium real GDP equals potential GDP D. remain stuck in a below full-employment equilibrium If the economy…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
Text book image
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning