A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system
Can increase loans are

Question

Quizplus · Accepted Answer

The bank's required reserves are 20% of its checkable-deposit liabilities, which equals $100,000. The bank's current reserves are $150,000, so it has excess reserves of $50,000 ($150,000 - $100,000). The bank can increase loans by up to its excess reserves, which is $50,000.

For the banking system as a whole, the potential increase in loans is determined by the money multiplier, which is the reciprocal of the reserve requirement ratio. In this case, the money multiplier is 1/0.20 = 5. So the banking system can potentially increase loans by up to 5 times the amount of excess reserves held by all banks combined, which is $250,000 ($50,000 x 5).

A Commercial Bank Has Checkable-Deposit Liabilities of $500,000, Reserves of $150,000