Question

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans

Answer 1

Total decrease in loans = $200 million

Step-by-step explanation:

The computation of bank loan is shown below:-

Current required reserves = Deposit - Loans (excess reserves)

= $400 million - $380 million

= $20 million

Required reserve ratio = Required reserves ÷ Deposits

= $20 million ÷ $400 million

= $0.05 million

Total decrease in loans = Increase in excess reserves ÷ Required reserve ratio

= $10 million ÷ $0.05 million

= $200 million