Question

If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $10, then this bank a. must increase its required reserves by $10. b. will initially see its total reserves increase by $10.50. c. will be able to make new loans up to a maximum of $9.50. d. All of the above are correct.

Answer 1

c. will be able to make new loans up to a maximum of $9.50

Step-by-step explanation:

If the reserve requirement is 5% it means that the bank is required to reserve(not loan out) 5% of it's reserves so in this case the bank is required to 5% of 10 (0.05*10) $0.50 as reserves and can loan out $9.50 (10-0.50). As the bank has no desire to hold on to excess reserves we can be sure that it will only hold 0.50 as reserve as it is required and loan out $9.50. So statement c is correct.

Statement A is incorrect because the bank does not need to increase required reserve by $10 but by just $0.50.

Statement B is incorrect a deposit of $10 cannot increase the total reserve by $10.50 as it is impossible mathematically.

Statement d is incorrect because 2 of the 3 statements are incorrect therefore all of the above statements cant be correct.