Question

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is:

a. $2,000
b. $8,000
c. $10,000
d. $20,000

Answer 1

The maximum amount by which the bank may increase its loans is a. $2,000.

Step-by-step explanation:

The reserve requirement is the percentage of deposits that banks are required to hold as reserves. In this case, the reserve requirement is 20%. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is:

$10,000 x 0.2 (reserve requirement) = $2,000

So, the maximum amount by which this bank may increase its loans is $2,000.