Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent.If the Federal Reserve reduces the required reserve ratio to 8 percent,then the bank can make a maximum loan of

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When the Federal Reserve reduces the required reserve ratio from 10% to 8%, the bank needs to hold less money in reserves for the same amount of deposits. Originally, with a 10% reserve requirement on $100 million, the bank needed to hold $10 million in reserves. Reducing the reserve requirement to 8% means the bank now needs to hold only $8 million in reserves for the $100 million in deposits. This frees up $2 million ($10 million - $8 million) that the bank can now lend out.

Suppose a Bank Has $100 Million in Checking Account Deposits