Please answer the following questions in the space provided. Show your work. 4.
ID: 2799408 • Letter: P
Question
Please answer the following questions in the space provided. Show your work. 4. Suppose that Springfield National Bank has reserves totalin of deposits. The reserve requirement is 10 percent. g $100,000 on $1,000,000 4a. Can this bank make any new loans? Explain. 4b. Suppose that Patrick, fearing an impending financial crisis, withdraws $20,000 from his account at Springfield National Bank and buries the cash in his backyard. By how much will the bank have to reduce its loans? Calculate the maximum amount the total deposits in the banking system may contract as a result. Show your work.Explanation / Answer
1. there are some norms which every bank have to comply with. one of that is reserve ratio requirement.
reserve ratio tells you the amount of deposit bank need to be reserve i.e which they cant use it for loan or any other work.
here reserve requirement is 10%
reserve mount = % * deposit
=10% * 1,000,000
=1,00,000
as the bank have already keep this in reserve ,the balance amount he can use to give loans etc
balance amount = 1,000,000 - 1,00,000
=9,00,000
2. amount of deposit decrease is =20000
new current deposit including reserve = 1,000,000 - 20000
=980000
reserve requirement = 10% *980000
=98000
we assume that we have already use the full deposit to give loan except reserve amount.
so when the customer withdraw the amount , bank use the reserve amount to pay that
earlier reserve = 100000
reserve after withdrawl = 100000 -20000
=80000
but new reserve requirement = 98000
so the amount of loan they have to decrease = 98000 - 80000 = 18000
the maximum amount of deposit can use for loan = 980,000 - 98000
=882000
to verify :
we provided loan earlier = 900000
loan decrease = 18000
current loan provided = 900000-18000
=882000