Question

assume we have a simplified banking system in balance-sheet equilibrium. also assume that all banks are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. a commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of:

Answer 1

A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of $90.

Step-by-step explanation:

A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of $90.

According to the given information, the bank is subject to a 10 percent reserve requirement.

This means that the bank must hold 10 percent of its demand deposits in reserves.

Since the new deposit is $100, the bank must hold $10 (10% of $100) in reserves and can use the remaining $90 to extend new loans.