A chartered bank has demand-deposit liabilities of $500,000, cash reserves of $150,000, and a desired reserve ratio of 20 percent.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Question

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The required reserves for this bank can be calculated as follows:

Required Reserves = Demand-Deposit Liabilities × Reserve Ratio
Required Reserves = $500,000 × 0.20
Required Reserves = $100,000

Since the bank currently holds cash reserves of $150,000, it already has excess reserves of $50,000.

The amount by which this single chartered bank can increase loans is equal to its excess reserves, which is $50,000.

The amount by which the banking system can increase loans is equal to the excess reserves in the entire banking system. We are not given this information in the question. However, we can make an estimate based on the reserve ratio. If the reserve ratio for all banks is also 20 percent, then the total demand-deposit liabilities for all banks would be:

Total Demand-Deposit Liabilities = Excess Reserves ÷ Reserve Ratio
Total Demand-Deposit Liabilities = $150,000 ÷ 0.20
Total Demand-Deposit Liabilities = $750,000

This means that the total cash reserves for all banks would be:

Total Cash Reserves = Total Demand-Deposit Liabilities × Reserve Ratio
Total Cash Reserves = $750,000 × 0.20
Total Cash Reserves = $150,000

Therefore, the excess reserves in the entire banking system would be:

Excess Reserves = Total Cash Reserves - Required Reserves
Excess Reserves = $150,000 - $100,000
Excess Reserves = $50,000

This is the same as the excess reserves for the single chartered bank. Therefore, the amount by which the banking system can increase loans is also $50,000.

A Chartered Bank Has Demand-Deposit Liabilities of $500,000, Cash Reserves