Economic Question from Schweser (Help)

CFA Level I
#1

Hi everyone, I need someone to help me to solve the following question: An analyst gathers the following information about Mounment State Bank: Demand deposits: $400m loans and securities $260m reserve requirement 10% the bank hans a total of 50m in cash and deposits with Federal Reserve Monument State bank is in a position to make additional loan of ? a 5m B 10m C 26m D 40m my solution: 400*90%=360m existing loan:260m, so they can make another 100m bUT I can select none of them.

#2

Only take into account the current demand deposits and apply the reserve ratio. 400M*.10 = 40m NOTE: the bank currently has 50 million at the Fed. Loan: 50m-40m = 10M -----B This is my rational, just make sure someone confirms

#3

yup. bank has 400m demand deposit. 400*10%= 40 this is the required reseve. However, the bank has 50m in reserve, so they can lend 10m more. answer B

#4

Thanks, ssdnola and northeastern, I still confuse, why the existing loan is irrelevant? from the text, I found if deposit is 100$ reserve ratio=0.25 then the bank can make loan of 100*0.25=75 Could u guys give me more explanation?

#5

The loans are already outstanding and should be accounted for in the prior reserve. You were right in your explanation “Deposit” 400m*.10 =40m (required to hold in reserve) and b/c they have 50m @ the Fed in “other reserves” which can cover what the individual bank has to hold they can lend the remaining 10m. Does that help?

#6

Northeastern Student Wrote: ------------------------------------------------------- > The loans are already outstanding and should be > accounted for in the prior reserve. You were right > in your explanation “Deposit” 400m*.10 =40m > (required to hold in reserve) and b/c they have > 50m @ the Fed in “other reserves” which can cover > what the individual bank has to hold they can lend > the remaining 10m. Does that help? yeah, I guess I may get the point. but, what does the left stand for, , say 360m?

#7

ssdnola Wrote: ------------------------------------------------------- > yup. bank has 400m demand deposit. 400*10%= 40 > this is the required reseve. However, the bank has > 50m in reserve, so they can lend 10m more. answer > B If the bank has $400m in demand deposits and only needs to hold 10% of that in reserves, then why is the amount they can lend out only $10m? Shouldn’t it be $400m + $10m as they already have $40m in the reserves as per the reserve ratio, so they can lend out the $400m PLUS the $10m excess reserves amount?