Final answer:
The maximum amount of money that a single commercial bank can lend is equal to its excess reserves. Excess reserves are the reserves that banks hold above the legally mandated limit, providing a buffer for unexpected withdrawals or loan demand.
Step-by-step explanation:
The maximum amount of money that a single commercial bank can lend is equal to its excess reserves.
Banks are legally required to hold a minimum level of reserves, but they can also hold additional excess reserves above the legally mandated limit. Excess reserves are the reserves that banks hold that exceed the legally mandated limit. These reserves provide a buffer for the bank to meet unexpected withdrawals or loan demand.
For example, during a recession, banks may be hesitant to lend because they fear that a high proportion of loan applicants become less likely to repay their loans. By holding excess reserves, banks can ensure they have enough money to meet the loan demand and mitigate the risk of default.