Answer:
The correct answer to the question is (1) The Bank One's (actual) reserves are $7,600 (2) The maximum amount of new money Bank One can produce by making loans is $1,000. (3) The maximum amount of new money that the entire banking system can produce in new money is $10,000.
Step-by-step explanation:
Solution
Now,
Calculate the Bank One's (actual) reserves :
The Reserves = Cash in Bank One's vault + Deposit in the Fed for Bank One
The Reserves = $3,100 + $4,500
Reserves = $7,600
hence,
The Bank One's (actual) reserves are $7,600.
Secondly,
The Checking of deposits in Bank One = $66,000
The Reserve requirement = 10% or 0.10
The Required reserves = Checking deposits * Reserve requirement
The Required reserves = $66,000 * 0.10 = $6,600
so
We Calculate the excess reserves, which is,
The Excess reserves = Total reserves - Required reserves = $7,600 - $6,600 = $1,000
Thus,
At maximum, A bank can make loan, an amount equal to excess reserves it held.
The Bank One has excess reserves of $1,000.
Then,
The Bank One can lend $1,000. Lending creates more money.s,
Thus,
The maximum amount of new money Bank One can produce by making loans is $1,000.
Now,
Let us, calculate the maximum amount of new money that entire banking system can make which is defined as :
The Maximum amount = Excess reserves with Bank One * (1/Reserve requirement)
The Maximum amount = $1,000 * (1/0.10) = $10,000
So,,
The maximum amount of new money that the entire banking system can produce in new money is $10,000.
Therefore, The maximum amount of new money that the entire banking system can produce in new money is $10,000.
Note: This is the complete question of this example given
Complete question: Economy One contains many banks. One of them is Bank One, which has a reserve requirement of 10% and the following information:
For the next three questions, use the same information provided:
$3100 cash in Bank One's vault
$66,000 checking deposits in Bank One
$4500 Deposit in the Fed for Bank One
$10,000 savings deposits in Bank One
$2900 US government bonds held by Bank One
1. Calculate Bank One's (actual) reserves, carefully following all numeric instructions.
2. Calculate the maximum amount of new money Bank One can create by making loans, carefully following all numeric instructions.
3. Calculate the maximum amount of new money the entire banking system can create in new money, carefully following all numeric instructions.