Exhibit 17-2

A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the required reserve ratio is 20 percent, what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

Question

Exhibit 17-2
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A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the required reserve ratio is 20 percent, what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

Quizplus · Accepted Answer

The bank's required reserves are 20% of its demand deposits ($3,000,000), which equals $600,000. Since the bank has $1,000,000 in total reserves, its excess reserves are $1,000,000 - $600,000 = $400,000. With a reserve ratio of 20%, the money multiplier is 1 / 0.20 = 5. Therefore, the excess reserves could be used to create $400,000 * 5 = $2,000,000 in the banking system.

Exhibit 17-2 ​

Exhibit 17-2