Please with this economics assigment question?

Question

First Bank has total deposits of $2,000,000 and legal reserves of $220,000.

a. If the reserve requirement is 10 percent, what is the maximum loan that First Bank can make, and what is the maximum increase in the money supply based on First Bank's reserve position?

b. If the reserve requirement is changed to 5 percent, how much can first bank lend,and by how much can the money supply be expanded?



Please help me out. Please show with workings and its under the topic monetary policy

Answer 1

If the reserve requirement is 10%, the bank must keep $200,000 in reserves (10% X $2 million = $200,000). So this leaves $20,000 (from the $220,000 in reserves) available to loan.

With a 5% reserve requirement, the bank would need reserves of 5% X $2 million = $100,000. Thus, with a 5% requirement, the bank can loan out an additional $120,000 of its $220,000 in reserves.