Hey all. I must be going brain dead because I am struggling with the following question. Show me the light! An analyst gathers the following information about Monument State Bank: Demand Deposits 400mil Loans and Securities 260mil Reserve req 10% The bank has a total of $50 mil in cash and deposits with the Fed Reserve Monument State Bank is in a position to make additional loans of: a) 5 mil b) 10 mil c) 26 mil d) 40 mil Answer: B) 10 mil
here’s my thought process - 1/.1 = 10 i thought it was D, as the expansion multiplier could be multiplied by the demand deposits at the bank.
i think it’s like this demand deposit *rr=40 mil bank has 50 mil in cash out of which needs to retain 40 mil for required reserve the problem i think si poorly stated. they want to say that cash for bank +deposits at fed =50 but at fed you need 40 mil - that means that you have 10 mil in cash to loan
I got it now…very poorly worded imo. Basically you have 400 mil in deposits, so the 10% required reserve is 40 mil. you currently have 50 mil at the fed in cash/deposits, therefore you can only lend out 50-40 = 10 min.
bay that is my understanding
I was wondering what happened to the remaining 400-260-50 = 90 million dollars, whether they could be given out as loans or not
ha, same questions from me, smeet.
http://en.wikipedia.org/wiki/Federal_funds_rate this is how i think it works. the reserve requirement may change each day depending on the demand deposits So as of prev day if the reuirement was for 50 mil, but has dropped to 40 mn due to a change in demand deposits, the bal 10 mn can be lent to other institutions who are short of funds ( at the fed rate )