Question

Suppose the Federal Reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lend out. If the reserve requirement is 10 percent, how much more money can banks create if they lend out the remaining amount?

Answer 1

Answer:

Bank's reserves are 500,000 dollars and the remaining part is available for banks to place it in the form of loans

Explanation:

Bank's obligatory reserves that they must hold in their accounts is 10% out of disposable amount, meaning if the amount is 5,000,000 dollars, then reserves are 500,000 dollars. The remaining part is disposable and banks can use it to grant loans. These reserves are held at the banks, but also in their accounts with central bank. Banks are obliged to hold these reserves due to provisions by regulatory organs.