Scenario 11-1
A bank's assets consist of $500 000 in total reserves, $1 600 000 in loans, and a building worth $1 200 000. Its liabilities and capital consist of $2 000 000 in demand deposits and $1 300 000 in capital.
-Refer to Scenario 11-1.If the desired reserve ratio is 10 percent,what is the level of the bank's excess reserves and how much money could the excess reserves be used to create in the banking system as a result?

Question

Quizplus · Accepted Answer

The bank's required reserves are $160,000 ($1,600,000 x 0.10) and its actual reserves are $500,000. This means the bank has excess reserves of $340,000 ($500,000 - $160,000). The money multiplier is 10 (1/0.10), so the excess reserves could be used to create $3,400,000 ($340,000 x 10) in the banking system. Therefore, option C is the correct answer.

Scenario 11-1 A Bank's Assets Consist of $500 000 in Total Reserves