Assume that the reserve requirement is 20 percent. First National Bank has vault cash and deposits with the Fed of $80 million, loans and securities of $320 million, and demand deposits of $400 million. First National:

Question

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First National Bank must maintain reserves of 20% of its demand deposits, which amounts to $80 million (20% of $400 million). Since it already has $80 million in reserves (vault cash and deposits with the Fed), it meets its reserve requirement exactly and cannot extend additional loans without acquiring more reserves.

Assume That the Reserve Requirement Is 20 Percent