Suppose the Required Reserve Ratio (RRR) is 10 percent and the balance sheet of the People's National Bank looks like the accompanying example:
Vault Cash- $20,000 Checking Deposits-$200,000
Deposits at Fed-$30,000 Net Worth-$15,000
What is the maximum loan the bank can extend? Indicate how the bank's balance sheet would be altered if it extended this loan (show the new T-account). Suppose that the required reserves were 20 percent. If this were the case, would the bank be in a position to extend any additional loans? Does the bank currently have any excess reserves?
>What is the maximum loan the bank can extend?
The bank's reserves are its vault cash plus its deposits at the Fed, totaling $50,000. With those reserves, it could extend loans totaling ($50,000/10% = ) $500,000. The bank is already extending $120,000 in loans, so it could extend a maximum of ($500,000 - $120,000 = ) $380,000 in additional loans.
>Indicate how the bank's balance ...
Given a bank's T-account showing its assets and liabilities, and knowing the Required Reserve Ratio (RRR) it faces, this solution shows how to calculate the bank's excess reserves, determine the maximum amount that it can extend in new loans, and show the transaction on the bank's T-account.