Question

Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500,000. This bank will initially expand its loans by

A) $50,000.
B) $450,000.
C) $500,000.
D) $4.5 million.
E) $5 million.

Answer 1

If Bank ABC has a target reserve ratio of 10% and no excess reserves, when it receives a new deposit of $500,000, it will initially expand its loan by $450,000.

Step-by-step explanation:

The initial loan expansion of a bank depends on its reserve ratio and excess reserves. In this case, Bank ABC has a target reserve ratio of 10% and no excess reserves. When it receives a new deposit of $500,000, it will expand its loans by the amount that is not reserved. Since the target reserve ratio is 10%, the bank will reserve 10% of $500,000, which is $50,000. Therefore, the bank will initially expand its loans by $450,000 ($500,000 - $50,000).