Initially a bank has a required reserve ratio of 20 percent and no excess reserves.If $5,000 is deposited into the bank,then initially,ceteris paribus,

Question

Quizplus · Accepted Answer

If $5,000 is deposited into the bank, the initial reserve requirement of 20 percent means the bank must hold $1,000 in reserves (20% of $5,000). This leaves the bank with $4,000 in excess reserves ($5,000 - $1,000).

The bank can use these excess reserves to increase its loans by a maximum of $4,000 (equal to the excess reserves). Therefore, answer B is correct.

Total reserves will increase by $1,000 (equal to the required reserves), not $4,000, and required reserves do not increase as a result of the deposit.

Initially a Bank Has a Required Reserve Ratio of 20