Use the following example to answer the following questions:
Imagine that Stella deposits $25,000 in currency (which she had been storing in her closet)into her checking account at the bank.Assume that this institution has a required reserve ratio of 25 percent.
-As a result of this deposit,what is the maximum amount the bank can hold as loans?
A) $0
B) $18,750
C) $25,000
D) $31,250
E) $100,000

Question

Quizplus · Accepted Answer

The maximum amount the bank can hold as loans is calculated by taking the deposited amount and multiplying it by the reciprocal of the required reserve ratio. In this case, 25% reciprocal is 4/1. Therefore, the maximum amount available for loans is $25,000 x 4/1 which equals $100,000, but since the bank must hold 25% of the deposit as a reserve, the maximum loan amount is $100,000 - ($25,000 x 25%) = $18,750.

Use the Following Example to Answer the Following Questions