Tried searching for this one, no luck. Question #35 from Schweser book 6, Exam 2 AM Demand Deposits: $400mm Loans and Securities: $260mm Reserve Requirement: 10% Bank has $50mm total in cash/deposits with the Fed Reserve Monument State Bank is in a position to make additional loans of: a) $5mm b) $10mm c) $26mm d) $40mm I was expecting the answer for this to be “$100mm” - as the extra 10mm in reserves could be leveraged 10x according to the 10% reserve requirement. Where am I off in this? Official answer and reasoning is below, still doesn’t make sense. Thanks! Answer: B Demand deposits)(reserve requirement) = required reserves (400)(0.1) = 40 Actual reserves (50) – required reserves (40) = excess reserves (10) The bank can lend $10 million. Note that the banking system can increase loans by more than this, but this question concerns a single bank.
you are correct in what you say, however that is not exactly what the question is asking, it is only asking what the excess reserve is, not what this could multiply to