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.

              

                 v.           At the end of the credit creation process, what will be the final value of the deposits?

Answer 1

The bank has K 1500 reserves so it can raise up to K 1500/0.1$=$ K 15000 deposits.

Total loans$=$ deposits$-$ reserves

K 15000$-$K 1500$=$ K 13500

Total deposits$=$ K 15000$+$ Total loans

K 15000+ K13500$=$K 28500

Answer$=$ K 28500

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