Question

Imagine that the banking system received additional deposits of $100 million and that all the individual banks wish to retain their current liquidity ratio of 20%. How much of these extra total deposits are matched by (i) liquid assets; (ii) illiquid assets? 

Answer 1

I)By liquid assets

=Liquidity ratio$\times$ additional deposits

$=0.2×\$100$ million

$=\$20$ million

b)By illiquid assets

=(1-liquidity ratio)$×$ additional deposits

$=(1-0.2)×\$100$ million

$=\$80$ million