Question

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?A) $2,000

B) $8,000
C) $10,000
D) $50,000

Answer 1

Maximum money that bank can lend is $50,000

Step-by-step explanation:

Given data:

Amount deposit is $10,000

reserve ratio is 0.20

Maximum money that bank can lend is calculated as

maximum money = (deposit - reserve)× money multiplier

money multiplier
`= (1)/(reserve\ ratio)`

money multiplier
`= (1)/(0.20) = 5`

and reserve is zero hence

maximum money = (10,000 - 0)× 5

maximum money = $50,000