Question

If a bank has total reserves of $200,000 and $1 million in deposits, how much money can it lend if the required reserve ratio is

a. 4 percent?

Answer 1

The bank with $1 million in deposits and a 4 percent reserve ratio must keep $40,000 in reserves; thus, it can lend out $160,000 of its $200,000 total reserves.

Step-by-step explanation:

If a bank has total reserves of $200,000 and $1 million in deposits, and the required reserve ratio is 4 percent, the bank must keep 4% of $1 million, which equals $40,000, in reserves. Therefore, the amount of money the bank can lend is the total reserves minus the required reserves.

The calculation would be $200,000 (total reserves) - $40,000 (required reserves at 4%) = $160,000 available for lending. So, the bank can lend out $160,000 if the required reserve ratio is 4 percent.