The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent.
Assets Liabilities + Net Worth
Reserves $100,000 Checkable Deposits $300,000
Loans 140,000 Stock Shares 200,000
Securities 60,000
Property 200,000
Refer to the above information. If the original bank balance sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of: (Hint: Since we are looking at the whole banking system the excess reserves of all the banks can be lent, creating new deposits and new lending in the banking system. In short we will have the monetary multiplier effect. To answer this question multiply the excess reserves by the multiplier.
1) $40,000
2) $100,000
3) $200,000
4) $300.000
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