Question

Assets Liabilities Net Worth Reserves $120,000 Checkable Deposits $300,000 Loans 140,000 Stock Shares 200,000 Securities 40,000 Property 200,000 The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans and deposits could have been expanded by a maximum of

Answer 1

Answer:

$300,000

Explanation:

Money Multiplier = 1 / Required Reserve Ratio

Money Multiplier = 1 / 0.20

Money Multiplier = 5

Reserve requirement will be 20% of $300,000 (Checkable Deposits)

Reserve requirement = $60,000

Excess Reserves = Reserve - Required Reserve

Excess Reserves = $120,000 - $60,000

Excess Reserves = $60,000

Expansion in loans and deposits will be: Excess reserves * money multiplier

= $60,000 * 5

= $300,000

So, if the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans and deposits could have been expanded by a maximum of $300,000.