Exhibit 25-2 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 25-2.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

Quizplus · Accepted Answer

The required reserves are 20% of $3,000,000 in demand deposits, which is $600,000. The bank's total reserves are $1,000,000, so the excess reserves are $1,000,000 - $600,000 = $400,000. The money multiplier is 1/0.20 = 5, so the excess reserves could create $400,000 * 5 = $2,000,000 in the banking system.

Exhibit 25-2 a Bank's Assets Consist of $1,000,000 in Total