The commercial banks in Fundland have
Reserves $500 million
Loans $3,500 million
Deposits $4,000 million
Total assets $5,000 million
The banks hold no excess reserves.
a) Calculate the banks' desired reserve ratio.
b) An immigrant arrives in Fundland with $10 million, which she deposits in a bank. How much does the immigrant's bank lend initially?
a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Fundland, the banks' desired reserve ratio is 500/4000 = 0.125 or
12.5 percent.
b) With a desired reserve ratio of 12.5 percent, the bank keeps $10 million × 0.125 = $1.25 million on reserve. It then lends the rest, so it lends $10 million - $1.25 million, which is
$8.75 million.
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