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New Loans Relative to Excess Reserves

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Given this information, answer the questions below:
Cash reserves = 5,500
Demand deposits = 100,000
The required reserve ratio is 5 percent.
a.How much is the bank required to hold as reserves given its deposits are $100,000?
b.How much are its excess reserves?
c.By how much can this bank expand its loans?
d.By how much can the banking system expand loans based on the excess reserves you indicated you indicated in part b?

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Solution Summary

This solution shows how to calculate the amount of new loans that can be created in the banking system in response to a bank's excess reserves.

Solution Preview

a) 5% of $100,000, so the bank has to hold $5,000
b) $500
c) ...

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