ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If a bank has excess reserves of $100, 000, then it can lend out only up to $100, 000; but if the banking system has excess reserves of $100, 000, then the system can make additional loans totaling more than $100, 000. A bank can grant loans up to the amount of its actual reserves.

Detailed explanation-2: -Excess Reserves = Total Reserves-Required Reserves For example, suppose a bank has $20 million in deposits. If its reserve ratio is 10%, then it’s required to keep at least $2 million on hand. However, if the bank has $3 million in reserves, then $1 million of it is in excess reserves.

Detailed explanation-3: -The formulas for calculating changes in the money supply are as follows. Firstly, Money Multiplier = 1 / Reserve Ratio. Finally, to calculate the maximum change in the money supply, use the formula Change in Money Supply = Change in Reserves * Money Multiplier.

Detailed explanation-4: -With a ratio of 100% this means that even if every single customer demanded to take out their money, the bank will have it all available. This is clearly a very safe form of banking, but as described so far, the bank would simply be acting like a safe deposit box. It would not be able to make any loans.