Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%?
A) The bank's required reserves will decrease to $500.
B) The bank's excess reserves will increase to $1,000.
C) The bank's required reserves will increase to $1,000.
D) The bank's ability to create loans increases by 5%.

Question

Quizplus · Accepted Answer

If the required reserve ratio is increased from 5% to 10%, the bank's required reserves will increase to $1,000 (10% of $10,000 in deposits). This means the bank will have to hold $1,000 in reserves instead of the previous $500. There will be no change in the bank's excess reserves or ability to create loans.

Suppose a Bank Has $10,000 in Deposits and $1,000 in Reserves