Suppose a bank has the following balance sheet:
Assets Liabilities
Reserves $14,000 Deposits $100,000
Loans $90,000 Net Worth $4,000
If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?
What will be an ideal response?
If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 or $4,000). This is the maximum that the bank can loan out.
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