Answer:
a. The bank is required to keep at least $15 and therefore lend no more than $85.
b. The money multiplier is equal to 6.67. can be turned into $666.67
Explanation:
a. We must first get the cash reserve in this banking system which will be calculated as : The reserve ratio x the amount deposited into the banking system = 15% x $100 = $15 therefore the banking system will keep this amount in its reserves for every $100 deposit.
Now we will look for how much they not allowed to lend more than which will be : The amount deposited - The cash reserve = $100 -$15 = $85
we know that when money is deposited into a banking system part of it becomes cash reserves and part of it will become money that is available to lend which if you combine these amounts they give the cash deposit into the banking system. Another way to calculate this is by saying :
Reserve ratio + Lending ratio = 1
0.15 + Lending Ratio = 1
Lending Ratio = 1- 0.15
Lending Ratio = 0.85
Maximum Lending amount per $100 deposit = 0.85 x $100 = $85
so they can lend not more than $85 as they cannot exceed what is deposited in the banking system.
b. The money multiplier is how much of the cash reserve can be multiplied over a banking system which we calculate as follows:
Money multiplier = 1/Reserve Ratio
= 1/0.15
=6.6667
which in turn means that for every $1 reserved in the banking system it can be multiplied to $6.67 therefore for every $100 deposit it can be multiplied to $666.67 through the banking system.
