If the reserve ratio is 10 percent and a bank receives a new deposit of $500, which of the following will this bank most likely do?

Question

Quizplus · Accepted Answer

The reserve ratio is the proportion of deposits that banks must hold in reserve. If the reserve ratio is 10%, this means that the bank must keep 10% of any new deposit as required reserves and can use the remaining 90% to make loans.

When the bank receives a new deposit of $500, it must keep $50 (10% of $500) as required reserves and can use the remaining $450 to make loans. Therefore, initially, the bank will see its total reserves increase by $500 ($50 required reserves + $450 excess reserves).

Option A is incorrect because the bank only needs to increase its required reserves by $50, not $5000.
Option B is incorrect because the bank can only make new loans of $450, not $5000.
Option C is incorrect because the bank can make new loans of $450, not $500.

If the Reserve Ratio Is 10 Percent and a Bank