Answer to Question #88280 in Macroeconomics for Jason

Question

if a bank has deposits of 100 000 and it can loan out 80 000, but has excess reserves of 5000 what is the required reserves and ratio.
What amount of credit is the bank allowed to give?

Answer 1

Required reserves= 20,000

Reserve ratio=20%

The amount of credit the bank is allowed to give= 25,000

Explanation

If the bank can loan out 80,000 out of the 100,000 deposits, then the required reserve would be the difference of the deposits and the amount it can loan out. That is required reserve is;

100,000-80,000= 20,000

Thus, required reserve is 20,000

Actual reserve= required reserve+ excess reserve

                        =20,000+5000

                        =25000

Therefore, the actual reserve is 25,000

Reserve ratio is percentage of the deposits that Federal Reserve requires banks to keep at Federal Reserve Bank. Thus the formula is;

Required reserve ratio= Reserve/Deposits

                                   =20000/100000*100%

                                  =20%

Thus, required reserve ratio is 20%

The amount of credit the bank is allowed to give is calculated using the formula;

1/reserve ratio*excess reserves

=1/.20*5000

=25,000

Reference

https://www3.nd.edu/~cwilber/econ504/504book/prob13a.html