Question

Ms. Smith withdraws $1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 10 percent, how will this deposit increase the bank’s required reserves and the bank’s loans?

Answer 1

Required reserve increases by $100

Loanable funds increases by $900

Step-by-step explanation:

Given the following ;

Deposit = $1000

Reserve requirement = 10% ( This is the minimum amount which a bank should hold as reserve, that is it should be kept in the bank's coffers and not be loaned out).

With a 10% Reserve requirement (RR) and a deposit of $1,000

Required reserve = (10÷100) × 1000

Required reserve = 0.1 × 1000 = $100

B.) Once the required reserve has been deducted, the rest may be loaned out. Therefore,

Deposit - Required reserve

$1000 - $100 = $900

Answer 2

how will this deposit increase the bank’s required reserves

• the bank's reserves will increase by $1,000 x 10% = $100

and the bank’s loans?

• this deposit will increase the amount of money that the bank can loan by $1,000 - $100 = $900

on the other hand, this deposit can have a larger effect on the total banking system through the money multiplier:

money multiplier = 1 / required reserve rate = 1 / 10% = 10

effect on the total banking system = (initial deposit x money multiplier) - initial deposit = ($1,000 x 10) - $1,000 = $10,00 - $1,000 = $9,000