Leniency Banks wishes to cater to the demands of the residents of Prudence Islan

Question

Leniency Banks wishes to cater to the demands of the residents of Prudence Island, RI, a savings minded clientele...

Leniency Bank wishes to cater to the demands of the residents of Prudence Island, Rl, a savings-minded clientele with an unusual appetite for government securities. To this end, Leniency bank is planning a large government bonds purchase, which later will be offered to its account holders. The bonds are purchased with the reserves of the bank. The following balance sheet describes the bank's current financial situation in millions of dollars. Suppose that the required reserve ratio set by the Fed is 10%. What would be the largest government securities purchase Leniency Bank could afford before it becomes fully loaned up?

Explanation / Answer

Required reserves = 10% of the checkable deposits = 10% of $240,000,000 = $24,000,000

Current reserves = $11,000,000 + $50,000,000 = $61,000,000

Excess reserves = $61,000,000 - $24,000,000 = $37,000,000

Leniency bank has $37 million which it can afford to spend on government securities before it is fully loaned-up.

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