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28 January, 06:35

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans

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  1. 28 January, 07:41
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    Total decrease in loans = $200 million

    Explanation:

    The computation of bank loan is shown below:-

    Current required reserves = Deposit - Loans (excess reserves)

    = $400 million - $380 million

    = $20 million

    Required reserve ratio = Required reserves : Deposits

    = $20 million : $400 million

    = $0.05 million

    Total decrease in loans = Increase in excess reserves : Required reserve ratio

    = $10 million : $0.05 million

    = $200 million
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