If a bank that faces a 25 percent reserve ratio received a deposit of $30,000 and makes a loan to a customer for $10,000,what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Question

Quizplus · Accepted Answer

The initial deposit of $30,000 increases both the bank's required reserves and its excess reserves by $7,500 ($30,000 x 0.25). When the bank makes a loan of $10,000, the required reserves remain the same but the excess reserves decrease by $10,000, leaving the bank with $17,500 in excess reserves ($27,500 - $10,000). When the bank deposits the remaining funds at the Federal Reserve, the excess reserves increase by $12,500 ($30,000 - $10,000 - $7,500) and the required reserves increase by $7,500, bringing the total required reserves to $15,000 ($30,000 x 0.5). Therefore, the correct choice is C.

If a Bank That Faces a 25 Percent Reserve Ratio