Question

First National Bank Assets Liabilities and Net Worth US Treasury Bonds $450,000 Net Worth $500,000 Reserves (Cash) $175,000 Checkable Deposits $250,000 Loans $125,000 Second National Bank Assets Liabilities and Net Worth US Treasury Bonds $100,000 Net Worth $250,000 Reserves (Cash) $250,000 Checkable Deposits $100,000 Third National Bank Assets Liabilities and Net Worth US Treasury Bonds $900,000 Net Worth $1,000,000 Reserves (Cash) $350,000 Checkable Deposits $500,000 Loans $250,000
The Required Reserve Ratio is 25% for all banks. Assuming that all the customers that have outstanding loans have used all of those additional funds to invest in new machinery for their businesses (therefore, the amount of Checkable Deposits is the true liability the bank has to its customers), the whole system (these three banks) is capable of creating $_____________ in new loans?

Answer 1

Answer:

The Required Reserve Ratio is 25% for all banks. Assuming that all the customers that have outstanding loans have used all of those additional funds to invest in new machinery for their businesses (therefore, the amount of Checkable Deposits is the true liability the bank has to its customers), the whole system (these three banks) is capable of creating $___3,400,000____ in new loans.

Explanation:

a) Data and Calculations:

Required Reserve Ratio (RRR) = 25%

Checkable Deposits:

First National Bank                    $250,000

Second National Bank                  100,000

Third National Bank                     500,000

Total of Checkable Deposits = $850,000

Money Supply = Total Checkable Deposits/Required Reserve Ratio

= $850,000/25%

= $3,400,000

b) The computation of the total Money Supply is based on the stated assumption that "all the customers that have outstanding loans have used all of those additional funds to invest in new machinery for their businesses (therefore, the amount of Checkable Deposits is the true liability the bank has to its customers)."