Question

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8 percent, then the bank can make a maximum loan of _____.

(a) $0
(b) $2 million
(c) $8 million
(d) $10 million

Answer 1

b. $ 2million loan

Step-by-step explanation:

Base on the scenario been described in the question, if we observe, formally, the bank was having $1million in the checking account deposits with the federal reserve with no excess, and the reserve ratio is 10 percentage . since the federal reserve reduced it reserve ratio to 8 percent, the bank will have excess reserve of 2 percent which it can give a maximum loan of 2million.

Answer 2

$2 million

Step-by-step explanation:

Reserve is the amount of cash a bank is required to keep without using in its daily transactions.

This is required by monetary authorities as a backup in case of business failure.

Reserve is calculated as

Reserve= Reserve percentage * Deposits

Initial reserves= 0.10 * 100 million= $10 million

Present reserves= 0.08 * 100 million= $8million

Excess reserve = Initial reserves - Present reserves

Excess reserve= 10 million - 8 million

Excess reserve= $2 million

Since the excess reserve is positive this amount can be given out as loans