The table shows the commercial banks' balance sheet (aggregated over all the banks). The commercial banks' desired reserve ratio on all deposits is 2 percent and there is no currency drain. What is the quantity of loans and the quantity of total deposits when the banks have no excess reserves?
Answer to 2 decimal places.
The total quantity of loans after the banks have lent all their excess reserves is $1915.00 million. The total quantity of deposits after the banks have lent all their excess reserves is $ [ ].
Assets
Reserves at the Fed 25
Cash in vault 15
Securities 45
Loans 120
Liabilities
Checkable deposits 85
Savings deposits 120
Answer (2)
After calculating the required reserves and understanding the banks' lending behavior, we find that the total quantity of deposits after lending all excess reserves amounts to 2000.00 million. This includes both the initial deposits and the increase from loans made by the banks. Hence, the total number of deposits reflects the effect of lending in the banking system.
;
Calculate the initial total deposits: $205 million.
Calculate the required reserves: $4.1 million.
Calculate the change in loans: $1795 million.
Calculate the final total deposits: 2000.00 million.
Explanation
Understanding the Problem We are given the balance sheet of commercial banks and need to find the total quantity of deposits when the banks have no excess reserves, given that the total quantity of loans is $1915 million. We know the initial reserves, checkable deposits, savings deposits, and loans. We also know the desired reserve ratio is 2 percent and there is no currency drain.
Calculating Initial Total Deposits First, calculate the initial total deposits by summing the checkable and savings deposits: T o t a l De p os i t s = C h ec kab l e De p os i t s + S a v in g s De p os i t s = 85 + 120 = 205 ( mi ll i o n s )
Calculating Required Reserves Next, calculate the required reserves based on the initial total deposits and the desired reserve ratio of 2%: R e q u i re d R eser v es = T o t a l De p os i t s × R eser v e R a t i o = 205 × 0.02 = 4.1 ( mi ll i o n s )
Calculating Initial Reserves Now, calculate the initial reserves: I ni t ia l R eser v es = R eser v es a t F e d + C a s h in Va u lt = 25 + 15 = 40 ( mi ll i o n s )
Calculating Excess Reserves Calculate the excess reserves: E x cess R eser v es = I ni t ia l R eser v es − R e q u i re d R eser v es = 40 − 4.1 = 35.9 ( mi ll i o n s )
Determining the Change in Loans Determine the change in loans: C han g e in L o an s = F ina l L o an s − I ni t ia l L o an s = 1915 − 120 = 1795 ( mi ll i o n s )
Determining the Change in Deposits Since there is no currency drain, the change in deposits equals the change in loans: C han g e in De p os i t s = C han g e in L o an s = 1795 ( mi ll i o n s )
Calculating Final Total Deposits Calculate the final total deposits: F ina l T o t a l De p os i t s = I ni t ia l T o t a l De p os i t s + C han g e in De p os i t s = 205 + 1795 = 2000 ( mi ll i o n s )
Final Answer Therefore, the total quantity of deposits after the banks have lent all their excess reserves is 2000.00 million.
Examples
Understanding how banks create money through lending is crucial in macroeconomics. For example, if a bank receives a new deposit of $100 and the reserve requirement is 10%, the bank can lend out $90. This $90 can then be deposited into another bank, which can lend out $81, and so on. This process, known as the money multiplier effect, shows how an initial deposit can lead to a much larger increase in the overall money supply, impacting economic activity and inflation. This concept is vital for understanding monetary policy and its effects on the economy.
