Question

If the banking system has demand deposits of $100,000, total reserves equal to $15,000, and a required reserve ratio of 10 percent, the banking system can increase the volume of loans by a maximum of

Answer 1

The banking system can increase the volume of loans by a maximum of $50,000

What are total reserves?

• A bank's reserves are calculated by multiplying its total deposits by the reserve ratio. For example, if a bank's deposits total $500 million, and the required reserve is 10%, multiply 500 by 0.10. The bank's required minimum reserve is $50 million.

Calculation of total reserves

• The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.

Total Reserves = Cash in vault + Deposits at Fed.

Required Reserves = RR x Liabilities.

Excess Reserves = Total Reserves - Required Reserves.

Change in Money Supply = initial Excess Reserves x Money Multiplier.

Money Multiplier = 1 / RR.

Therefore banking systems can increase the volume of loans by $50,000

To know more about bank reserves. click the given links.

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