Question

The balance sheet of the central bank is
Assets Liabilities
Gov't bonds $5000 Currency $2100
Gold $500 Reserves of commercial banks $3400
The consolidated balance sheet of commercial banks is
Assets Liabilities
Reserves at the central bank $3400 Deposits $14400
Loans $12000 Commercial bonds issued by banks $1000
If the required reserve-deposit ratio is 15%, can commercial banks increase the amount of loans by at least $1000?
A. Yes, by buying back the bonds and depositing the proceeds into the reserve account at the central bank.
B. Yes, by lowering reserves by $1000.
C. No, because the amount of deposits exceeds the amount of loans.
D. Yes, but only if some of the newly issued loans are redeposited to the banks.
E. No, because then the reserve-deposit ratio will fall below 15%.

Answer 1

Answer:

Option (B) is correct.

Explanation:

Given that,

Reserves of commercial banks = $3,400

Required reserve-deposit ratio = 15%

Deposits = $14,400

Required reserve = 15% of Deposits

                              = 0.15 × $14,400

                              = $2,160

Excess reserves is the difference between total reserves and required reserves.

Excess reserves = Total reserves - Required reserves

                            = $3,400 - $2,160

                            = $1,240

Therefore, the commercial banks can increase the amount of loans by $1,240. So, they can increase the loan amount by at least $1,000 by reducing its reserves by $1,000.