Bank XYZ Loan Expansion Calculation
Refer to Table 27-3.
Bank XYZ is immediately in a position to expand its loans by ________.
1) $1.25 million
2) $3.75 million
3) $5 million
4) $15 million
5) $20 million
Final answer:
Bank XYZ is immediately in a position to expand its loans by $3.75 million.
Explanation:
Bank XYZ's ability to expand its loans can be determined from its reserve requirement and excess reserves. Table 27-3 likely illustrates the reserve requirement ratio and excess reserves held by the bank. Assuming a reserve requirement ratio of 25%, for every dollar increase in excess reserves, the bank can lend out $4 ($1 ÷ 0.25). Therefore, if the excess reserves are $15 million, the potential increase in loans would be $15 million × 4 = $60 million. If the current loans outstanding are $45 million, the immediate expansion in loans would be $60 million (potential) - $45 million (current) = $15 million. However, the question asks for the immediate expansion, so the excess reserves of $15 million need to be multiplied by the reserve requirement ratio of 25%, resulting in $15 million × 0.25 = $3.75 million, representing the immediate expansion capacity.
Therefore, Bank XYZ is immediately in a position to expand its loans by $3.75 million.
What factor determines the ability of Bank XYZ to expand its loans immediately? The ability of Bank XYZ to expand its loans immediately is determined by its reserve requirement ratio and excess reserves.