Question

If a bank receives a new transaction deposit of $100,000 and the reserve ratio is 20 percent, then the bank could expand its loans by as much as $80,000. $400,000. $20,000. $100,000.

Answer 1

B. $400,000

Step-by-step explanation:

Recall that,

Max change in loans = the initial change in excess reserve × the money multiplier

Where

Initial change in excess reserve = (1 - 2%) × 100 = 80,000

Money multiplier = 1/2% = 5

Thus

Change in max loans = 80,000 × 5

= $400,000

Answer 2

Answer: $80,000

Explanation: The reserve ratio is the percentage of deposits a bank is to leave in its reserve account. From the question above, the total deposits is $100,000 and the reserve ratio is 20%. The reserve amount is $20,000(100,000*0.2) while the bank can loan out $80,000 balance of the $100,000 deposit.