Question

demand deposits of $10,000, the reserve requirement is .05, the Federal Funds rate is 6% and the Discount rate is 4% . How much money can it loan out

Answer 1

Answer:

The amount of money the bank can loan out is $200,000.

Explanation:

a) Data and Calculations

Demand deposits = $10,000

Reserve requirement = 0.05

Federal Funds rate = 6%

Discount rate = 4%

The money the bank can loan out = Demand Deposit/Reserve Requirement

= $10,000/0.05

= $200,000

b) The amount that the commercial bank can loan out is determined by the amount of its deposits and the ratio of the reserve requirement.  The reserve requirement ratio gives the percentage of deposits that commercial banks must hold as reserves in their vaults. This implies that if the required reserve ratio is 5 percent, for instance, the bank must hold 5 percent of its deposits as required reserves. If demand deposits are $10,000, then $500 ($10,000 x .05) must be held as required reserves and then the bank can lend out $9,500 to the first customer.  However, this amount will expand because the customer keeps the amount within the bank, enabling the bank to lend out $200,000 from a deposit of $10,000.  The total amount the bank can lend out is calculated as $10,000/0.05.