Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A?
A) zero, because Bank A has no excess reserves
B) $850
C) $50
D) $200

Question

Quizplus · Accepted Answer

The required reserves for Bank A is 15% of $1000, which is $150. Since Bank A has $200 in reserves, it has excess reserves of $50 ($200 - $150). Using the money multiplier formula, we can calculate the maximum amount of loans Bank A can create:
maximum loans = excess reserves / reserve ratio
maximum loans = $50 / 0.15
maximum loans = $333.33
Therefore, Bank A can create loans up to $333.33, but since it wants to keep the reserve ratio at 15%, it will only create loans up to $50 ($333.33 x 0.15).

Suppose Bank a Holds $200 of Reserves, Has Deposits of $1000