The commercial banks in Lendland have
Reserves $400 million
Loans $3,600 million
Deposits $4,000 million
Total assets $4,600 million
The banks hold no excess reserves.
a) Calculate the banks' reserve ratio.
b) An immigrant arrives in Lendland with $5 million, which he deposits in a bank. How much does the immigrant's bank lend initially?
a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Lendland, the banks' desired reserve ratio is 400/4000 = 0.1 or 10 percent.
b) With a desired reserve ratio of 10 percent, the bank keeps $5 million × 0.10 = $0.5 million on reserve. It then lends the rest, so it lends $5 million - $0.5 million, which is $4.5 million.
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