Question

The following is the balance sheet for Raymond Bank, one of many commercial banks in a country in which the banking system has limited reserves.

Assume a percent reserve requirement.
(a) Calculate Raymond Bank’s required reserves. Show your work.
(b) Calculate the maximum amount of additional loans that Raymond Bank can make without selling its holdings of government securities. Show your work.
(c) Assume that Raymond Bank and other banks now lend out all excess reserves.
(i) Calculate the maximum possible change in demand deposits throughout the banking system. Show your work. (ii) What is the maximum possible change in total reserves throughout the banking system?
(d) Suppose that the country’s central bank purchases of Raymond Bank’s holdings of government securities as part of its open-market operations. Do Raymond Bank’s required reserves initially increase, decrease, or remain the same as a result of the central bank’s purchase? Explain.

Answer 1

Step-by-step explanation:

(a) To calculate Raymond Bank's required reserves, you need to know the reserve requirement. Let's say the reserve requirement is 10%. To find the required reserves, you need to multiply the bank's demand deposits by the reserve requirement. For example, if Raymond Bank has $100,000 in demand deposits, its required reserves would be $10,000 (100,000 x 0.1).

(b) To calculate the maximum amount of additional loans that Raymond Bank can make without selling its holdings of government securities, you need to subtract the bank's required reserves from its excess reserves. Excess reserves are the amount of reserves that the bank has beyond what is required by the reserve requirement. For example, if Raymond Bank has $15,000 in excess reserves and $10,000 in required reserves, it can make up to $5,000 in additional loans (15,000 - 10,000).

(c) (i) To calculate the maximum possible change in demand deposits throughout the banking system, you need to know the amount of excess reserves that are available to be lent out. Let's say the total excess reserves in the banking system are $100,000. If all of these excess reserves are lent out, the maximum possible change in demand deposits would be $1,000,000 (100,000 / 0.1), assuming a reserve requirement of 10%.

(ii) The maximum possible change in total reserves throughout the banking system would be equal to the amount of excess reserves that are lent out. In this example, the maximum possible change in total reserves would be $100,000.

(d) If the country's central bank purchases Raymond Bank's holdings of government securities as part of its open-market operations, Raymond Bank's required reserves will initially decrease. This is because the central bank is increasing the bank's excess reserves, which are subtracted from the required reserves to determine the bank's reserve ratio. If the reserve ratio is above the required reserve ratio, the bank's required reserves will decrease.