A bank currently has $50 million in deposits,$6 million in cash in the vault,$4 million on deposit with the Bank of Canada,and $5 million in government securities.The required reserve ratio is 20 percent.A new deposit is made of $1 million.What is the maximum size loan the bank can now make?

Question

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With the new deposit of $1 million, the bank's total deposits increase to $51 million. The required reserves on $51 million at a 20% reserve ratio are $10.2 million. The bank already has $6 million in cash in the vault, $4 million on deposit with the Bank of Canada, and $5 million in government securities, totaling $15 million in reserves. Therefore, the bank has $4.8 million more than the required reserves. However, the maximum size loan it can now make is limited to the new deposit of $1 million because it can only lend out the excess reserves generated by this new deposit, which is $800,000 (80% of the new $1 million deposit, since 20% must be kept as reserves).

A Bank Currently Has $50 Million in Deposits,$6 Million in Cash