Question

A bank has $320 million in deposits and is holding $39 million in reserves. If the required reserve ratio is 10%, what is the maximum new loan amount the bank can extend? Type an answer and press enter to submit million dollars

Answer 1

$70 million

Step-by-step explanation:

first we must calculate excess reserves:

total deposits = $320 million

required reserve ratio = 10% = 10% x $320 million = $32 million

excess reserves = total reserves - required reserves = $39 million - $32 million = $7 million

once we calculates excess reserves, we must multiply that amount by the money multiplier to determine the maximum amount of new loans:

new loans = excess reserves x money multiplier = $7 million x (1 / 10%) = $7 million x 10 = $70 million

Answer 2

$7 million.

Step-by-step explanation:

• remember that, the bank can give new loan amount only from its excess reserves.

• calculation of required reserves:

required reserves= deposits*required reserve ratio

=$320m*10/100

=$32million

(it is given that, deposits =$320m and required reserve ratio=10%)

• therefore, the excess reserves = reserves held by bank-required reserves

=$39m-$32m

=$7m

hence, the maximum new loan amount the bank can extend = $7 million