A commercial banking system maintains cash reserves of \text{N}1,500,000, which fully sati… — JAMB UTME

A commercial banking system maintains cash reserves of $\text{N}1,500,000$ , which fully satisfies a mandatory Cash Reserve Ratio (CRR) of $15\%$ . If the Central Bank reduces the CRR to $12\%$ , what is the maximum additional credit expansion, in Naira, that the banking system can generate from the resulting excess reserves?

Cevap: 2500000 Naira

Cevap

The maximum additional credit expansion that the banking system can generate is 2,500,000 Naira.

When the Central Bank lowers the Cash Reserve Ratio from 15% to 12%, the total deposits supported by N1,500,000 in reserves increases from N10,000,000 (N1,500,000 / 0.15) to N12,500,000 (N1,500,000 / 0.12). The maximum additional credit expansion achievable by the banking system is the difference between the new total deposit capacity and the initial total deposits, which equals N2,500,000.

Adım Adım Çözüm

Determine the initial total deposits in the commercial banking system.

Initial Total Deposits = N10,000,000

Since N1,500,000 represents 15% of total deposits, total deposits = N1,500,000 / 0.15 = N10,000,000.

Calculate the new total credit expansion capacity under the 12% reserve ratio.

New Total Deposit Capacity = N12,500,000

With N1,500,000 reserves and a 12% CRR, the system can support total deposits of N1,500,000 / 0.12 = N12,500,000.

Subtract the initial total deposits from the new total deposit capacity to find additional expansion.

Additional Expansion = N2,500,000

N12,500,000 - N10,000,000 = N2,500,000.

Anahtar Kavram

Excess Reserves and Credit Creation Multiplier

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