S If the balance sheet below were for the entire banking sys

S. If the balance sheet below were for the entire banking system instead of just a single bank, by how much could loans be expanded? Assume a reserve ratio of33%. Assets Liabilities+Net Worth Reserves 60,000 Checkable deposits $150,000 60,000 Stock shares 300,000 Securities Loans Property 40,000 290,000

Solution

Solution: With reserve ratio, rr=33%, taking whole banking system as a joint bank, this joint bank is required to maintain 33% of it\'s checkable deposits as the reserves. Thus, initially required reserves = 0.33*150000 = $49,500.

With total reserves =$60,000, joint bank has excess reserves = total reserves - required reserves

ER = 60000 - 49500 = $10,500

Since, ER earns no interest, bank will lend out this amount. Thus, loans increase by 10,500 and excess reserves fall to 0. Now, this lent out loan is further assumed to be paid to someone who will again deposit it into bank. So, now checkable deposit of $10,500 is made. Again required reserve of 0.33*10500 = $3,465 is maintained, and remaining amount of $7,035 is lent. Following in this manner, Loans can be expanded to

10500 + 0.67*10500 + 0.67²*10500 + ....

This GP series sum up to 10500/1-0.67 = $31,818.18

So, loans can be expanded to 40,000 + 31818.18 = $71818.18