Answer to Question #213065 in Macroeconomics for geoffrey

Question

a)     You are given the following balance sheet of a commercial bank:

Assets

Liabilities

Reserves                    K 1,500

Loans                       K 3,500

Initial Deposit           K 5,000

Assume required reserve ratio is 10 percent and that 100% of all the loans are deposited as new deposits.

                

               iv.           By how much can the bank increase its loans?

                

Answer 1

calculate the credit multiplier which is =$1/$ reserve ratio=$1/10\%=\frac{(1/10)}{1/100}=100/10=10$

The initial deposit =K 5000

The maximum that the bank can extend as loan=credit multiplier$\times$ initial deposit =$10\times 5000=K50000$