Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to Molly. That bank can lend an additional:

Question

Quizplus · Accepted Answer

Before the deposits and lending transactions, the bank has $800 excess reserves, which means it can potentially lend up to $2,666.67 (excess reserves divided by the reserve ratio of 30%).

After Andy's deposit, the bank's reserves increase by $1,000. The bank now has $1,800 in reserves. This means the bank can lend up to $4,285.71 (reserves of $1,800 divided by the reserve ratio of 30%).

If the bank lends $600 to Molly, the bank's excess reserves will decrease to $600 ($1,800 reserves - $1,200 required reserves). This means the bank can lend up to $2,000 more ($600 Molly's loan + $1,400 new potential loans based on new reserve levels).

Therefore, the bank can lend an additional $900 ($2,000 - $1,100 already lent to Andy and Molly). So the correct answer is C) $900.

Suppose That Initially a Bank Has Excess Reserves of $800