Question

Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100,000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is

A) $1,000.
B) $10,000.
C) $90,000.
D) $100,000.
E) $900,000.

Answer 1

The largest new loan that Bank ABC could initially make while maintaining its target reserve ratio is $90,000(option c).

Step-by-step explanation:

In order to determine the largest new loan Bank ABC could initially make while maintaining its target reserve ratio of 10%, we need to calculate the required reserves. Required reserves are calculated by multiplying the deposit amount by the reserve ratio.

For Bank ABC, the new deposit is $100,000 and the reserve ratio is 10%.

So, the required reserves would be $100,000 x 10% = $10,000.

Therefore, the largest new loan that Bank ABC could initially make while maintaining its target reserve ratio is $100,000 - $10,000 = $90,000 (option C).