Question

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to

a.10 percent of its excess reserves.
b.its total reserves.
c.10 times its excess reserves.
d.its excess reserves.

Answer 1

With a required reserve ratio of 10%, a bank can increase its loans by up to 10 times its excess reserves due to the money multiplier effect.

Step-by-step explanation:

If the required reserve ratio is 10 percent, a bank can theoretically increase its loans up to a maximum amount equal to 10 times its excess reserves. This is because of the concept of the money multiplier, which amounts to 1 divided by the reserve requirement. In this case, with a 10% reserve requirement, the money multiplier is 10 (1 / 0.10 = 10). Therefore, for every dollar of excess reserves, the bank can extend 10 dollars in loans, effectively magnifying the impact of excess reserves in the banking system.