The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9% annual percentage rate. What is the maximum rate the bank can actually earn based on the
Quoted rate?

Question

Quizplus · Accepted Answer

The maximum rate the bank can actually earn is calculated using the equation: 
Quoted rate / (1 - Reserve requirement) 
Assuming a 10% reserve requirement, we have: 
7.9% / (1 - 0.10) = 8.78% 
However, since this rate exceeds the maximum allowed by the Federal Reserve, we need to adjust by subtracting the target federal funds rate of 2.0%: 
8.78% - 2.0% = 6.78% 
Therefore, the maximum rate the bank can actually earn is 6.78% + the quoted rate of 7.9%, which equals 8.22% (Option D).

The Smart Bank Wants to Appear Competitive Based on Quoted