A bank currently has $70,000 in transaction deposits, $6,000 in cash in the vault, $12,000 on deposit with the Fed, and $7,000 in government securities. The required reserve ratio is 20 percent.

Question

What is the maximum amount the money supply can increase, assuming this bank is the only bank in the system that has excess reserves?

What are the actual reserves, required reserves, excess reserves, and the money multiplier?

I want to check my Math

Answer 1

The bank needs to hold 14,000 in reserves. It currently has 18,000 in resrves or 4k in excess reserves. It coul loan 4000 and be holding nothing but required reserves. If the entire banking system maintains nothing but required reserves. the 4000 loan would create an additional 3200 in excess reserves in the banking system. If this is loaned out it will go through a multiplier process. The money multiplier is 1/(reserve-deposit ratio) or 1/0.2 = 5 so the 4,000 in excess reserves could create 20,000 in no loans/money