The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent.

Assets Liabilities + Net Worth

Reserves $100,000 Checkable Deposits $300,000

Loans 140,000 Stock Shares 200,000

Securities 60,000

Property 200,000

Refer to the above information. If the original bank balance sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of: (Hint: Since we are looking at the whole banking system the excess reserves of all the banks can be lent, creating new deposits and new lending in the banking system. In short we will have the monetary multiplier effect. To answer this question multiply the excess reserves by the multiplier.

1) $40,000

2) $100,000

3) $200,000

4) $300.000

Question

Carolyn Torres

Business

11 April, 06:55

The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent.

Assets Liabilities + Net Worth

Reserves $100,000 Checkable Deposits $300,000

Loans 140,000 Stock Shares 200,000

Securities 60,000

Property 200,000

Refer to the above information. If the original bank balance sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of: (Hint: Since we are looking at the whole banking system the excess reserves of all the banks can be lent, creating new deposits and new lending in the banking system. In short we will have the monetary multiplier effect. To answer this question multiply the excess reserves by the multiplier.

1) $40,000

2) $100,000

3) $200,000

4) $300.000

+5

Answers (1)

Know the Answer?

Sierra Hernandez · Answer 1

The answer is option (3) $200,000

Explanation:

Solution

Given that:

The reserve ratio = 20%

The Required reserves = 300000*20/100

=60000

The excess reserves = 100000-60000

=$40000

Thus

The Money multiplier = 1/0.20

= 5

Therefore, maximum amount by which loans could be expanded = 40000*5

= $200000