Question 2 The balance sheet below is for the EFG Bank. Assuming a Desired Reser

Question

Question 2 The balance sheet below is for the EFG Bank. Assuming a Desired Reserve Ratio of 20 percent, answer all parts of the following question. Liabilities and net worth Assets Reserves Loans Securities Property $ 90,000 $92,000 $100,000 $ 98,000 Demand Deposits $220,000 Capital Stock $160,000 Refer to the above information. a) (3 marks) How much excess reserve does this chartered bank have, b) (3 marks) what is the maximum amount this bank can safely lend out and, c) (4 marks) what is the maximum money-creating potential of the chartered banking system?

Explanation / Answer

Ans:

a)

Required reserve ratio = 20%

Required reserves = $220,000 * 20%

                              = $44000

Excess reserves = Total reserves - Required reserves

                           = $92,000 - $44,000

                           = $48,000

b) Maximum amount this bank can easily lend out = $220,000 - $44,000

                                                                                 = $176,000

c)

Money multipler = 1 / Required reserve ratio

                          = 1 / 20%

                          = 5

Maximum money created = Deposits * money multipler

                                          = $220,000 * 5

                                          = $1100,000

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