21 May WHAT IS THE MAXIMUM AMOUNT OF LOANS IT CAN MAKE?
Given a bank with only the following items on its balance sheet: $4000 of Reserves and $4000 of Deposits. The reserve ratio (R) = .20. a) List the assets and liabilities on the bank’s balance sheet. What is the amount of excess reserves? b) What is the maximum amount of loans it can make? List the items on the bank’s balance sheet after it has made these loans (but before any checks on the proceeds of the loans have cleared). By how much has the money supply changed? c) List the items on the bank’s balance sheet after checks have been drawn on the proceeds of the loans and the checks have cleared. d) List the items on the bank’s balance sheet (after checks have been drawn and cleared) if it had used its excess reserves to purchase securities rather than make loans. 2. Answer question #1 (parts a through c) if the reserve ratio = .10. B) The Banking System and the Money Multiplier Assume the balance sheet in question #1 represents the entire banking system rather than a single bank (which means you need to use the money multiplier). What is the maximum amount of deposits and lending that can be supported by the $4000 of reserves in the banking system (R = .20). List the items on the banking system’s balance sheet with this maximum amount of loans and deposits
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