Consider a bank that has the following balance sheet Assets Liabilities and Net
ID: 1097554 • Letter: C
Question
Consider a bank that has the following balance sheet
Assets
Liabilities and Net Worth
Reserves $100
Demand deposits $1,000
Loans $1,000
Net worth 100
A new customer opens a checking account and deposits $500 into it. For each of the following questions, assuming the required reserve ratio is 10 percent.
(A). After the new deposit, how much money can this bank lend?
(B). Assuming that the bank makes the largest loan possible, borrowers choose not to hold excess cash, and banks choose not to hold excess reserves, how many total new deposits can be created as a result of the initial $500 deposit?
Assets
Liabilities and Net Worth
Reserves $100
Demand deposits $1,000
Loans $1,000
Net worth 100
Explanation / Answer
We know = the required reserve ratio is 10 percent.
A) Hence, the bank can lend $500
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