Jane wins $100 comma 000 playing the lottery, and instead of spending it, she deposits it into her checking account at the First Bank of Anywhere. Her bank makes a loan (equal to its excess reserves) to Mary, who uses the money to remodel her home. The remodeling company deposits the money into the Second Bank of Anywhere. The required reserve ratio is 4 percent and each bank initially has no excess reserves. The amount of the loan made by the First Bank equals $ nothing. (Enter your response as an integer.)

Question

Lila Jensen

Business

6 November, 11:39

Jane wins $100 comma 000 playing the lottery, and instead of spending it, she deposits it into her checking account at the First Bank of Anywhere. Her bank makes a loan (equal to its excess reserves) to Mary, who uses the money to remodel her home. The remodeling company deposits the money into the Second Bank of Anywhere. The required reserve ratio is 4 percent and each bank initially has no excess reserves. The amount of the loan made by the First Bank equals $ nothing. (Enter your response as an integer.)

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Answers (1)

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Aylin Greer · Answer 1

The loan made by the First bank of Anywhere was 96,000

Explanation:

The bank had no excess reserves so it has take 4% of Jane's deposit to build reserve and leave the rest as loanable funds:

100,000 x (1 - 4% required reserve ratio) = $96,000 loanable funds

We must not mistkae this with the actual increase in the money supply which is calculated in a different way. This is just the first of a series of loan that different bank will do increasing the money supply.