Question

Suppose that Goldstar Bank is completely "loaned up." Now suppose that a customer deposits an additional $75,000 into the bank. Assume the reserve requirement is 20 percent.
Instructions:
Enter your answers as whole numbers.
a. As a consequence of the $75,000 deposit, Goldstar Bank will now have excess reserves in the amount of $______.
b. As a result of the $75,000 initial deposit into Goldstar Bank, the banking system can generate a maximum of $______ in new deposits and loans.

Answer 1

Answer:

The correct answer for (a) $ 60,000 (b) $300,000

Explanation:

Solution

(a) Now,

When $75,000 is deposited,  The reserve requirement is:

=0.20 * 75,000 = $15,000

Thus,

The Excess reserve = 75,000 - 15,000 = $60,000

(b) By applying Money multiplier,

Now,

Money multiplier = 1 / Required Reserve ratio

= 1 / 0.2 = 5

Therefore,

The maximum new deposits and loans generated  is = 60,000 * 5

Which gives us,

=$300,000