A bank currently has $100 million in deposits,$6 million in cash in the vault,deposits with the Bank of Canada of $4 million,and other assets equal to $90 million.The desired reserve ratio is 10 percent.A new deposit is made of $1 million.What is the maximum sized loan the bank can now make?

Question

Quizplus · Accepted Answer

The bank's current reserves are:
$6 million (cash in the vault) + $4 million (deposits with the Bank of Canada) = $10 million
The desired reserve ratio is 10%, which means the bank must keep 10% of its deposits in reserves.
Reserves required for $100 million in deposits = $100 million x 10% = $10 million
Total reserves after the new deposit = $10 million + $1 million = $11 million
So the bank can lend out the excess reserves, which are:
Excess reserves = Total reserves - Required reserves
Excess reserves = $11 million - $10 million = $1 million
However, the bank can only lend out a portion of the excess reserves, which is determined by the simple deposit multiplier:
Simple deposit multiplier = 1 / reserve ratio
Simple deposit multiplier = 1 / 10% = 10
Maximum loan = Excess reserves x simple deposit multiplier
Maximum loan = $1 million x 10 = $10 million
Therefore, the maximum loan the bank can now make is $900,000 ($10 million - $9.1 million in outstanding loans).

A Bank Currently Has $100 Million in Deposits,$6 Million in Cash