Answer:
The maximum amount of new loans the bank can extend=$900,000
Explanation:
Demand deposits form part of an account in a commercial bank or a financial institution that the depositor can withdraw at any time without prior notice. A larger demand deposit usually denotes a bigger required reserve.
The required reserve ratio is the total amount that commercial banks have to hold on to. This amount can not be withdrawn or invested.
We can determine the maximum amount of new loans the bank can extend as follows;
Step 1: Determine total amount in the bank
Using the expression;
T=D+A
where;
T=total amount
D=demand deposits
A=actual reserves
In our case;
T=unknown
D=$1,000,000
A=$300,000
replacing;
T=1,000,000+300,000=$1,300,000
Total amount in the commercial bank=$1,300,000
Step 2: Determine the required reserve for the demand deposits
Required reserve=reserve ratio×demand deposits
where;
reserve ratio=10%=10/100=0.1
total amount in the commercial bank=$1,000,000
replacing;
required reserve=0.1×1,000,000=$100,000
required reserve=$100,000
Step 3: Determine Maximum amount of new loans the bank can extend
Total reserve=actual reserve+required reserve
total reserve=300,000+100,000=$400,000
Maximum amount of new loans=Total amount in the commercial bank-total reserve=1,300,000-400,000=$900,000
The maximum amount of new loans the bank can extend=$900,000
