Question 2 The balance sheet below is for the EFG Bank Assum

Question 2+ The balance sheet below is for the EFG Bank. Assuming a Desired Reserve Ratio of 20 percent, answer all parts of the following question. Liabilities and net worth Assets Reserves Loans Securities Property $ 90,000 Demand Deposits $220,000 $ 92,000 $100,000 S 98,000 Capital Stock $160,000+ Refer to the above information. + a) (3 marks) How much excess reserve does this chartered bank have, - b) (3 marks) what is the maximum amount this bank can safely lend out and, c) (4 marks) what is the maximum money-creating potential of the chartered banking system?\'

Solution

1) The reserve ratio is 20% which means the bank has to keep 20% of its total deposits as reserves. The bank has deposits of $220000, of which 20% should be reserves. 20% of $220000 is $44000. However, the total reserves are $92000. Hence, they have excess reserves worth $48000.

2) This bank can lend out the amount left after keeping the reserves. It can lend out $220000 + $160000 - $44000 which is equal to $336000.

3) The multiplier will be equal to 1/reserves as a fraction of total liabilities. Reserves as a fraction of total liabilities is $44000/ $380000 = 0.115. So multiplier is equal to 1/0.115 = 8.69. So money-creating potential is 8.69 x $380000 = $3304347.