(Table) SCENARIO: Assume that Empathy State Bank begins with the balance sheet and is fully loaned-up. This bank's reserve ratio is
A) 0.025.
B) 0.075.
C) 0.10.
D) 0.25.

Question

(Table) SCENARIO: Assume that Empathy State Bank begins with the balance sheet and is fully loaned-up. This bank's reserve ratio is 
A) 0.025. 
B) 0.075. 
C) 0.10. 
D) 0.25.

Quizplus · Accepted Answer

Since the reserve ratio is the ratio of reserves to deposits, we can calculate the amount of deposits as follows: 
Reserves = Reserve Ratio * Deposits 
1,169,200 = 0.1 * Deposits 
Deposits = 11,692,000 
Therefore, the bank's total assets (balance sheet) would be equal to its deposits, which is fully loaned-up. 
If the reserve ratio were lower, such as 0.025 or 0.075, the bank would have to hold less in reserves and could loan out more money, increasing its assets beyond the deposit amount. 
If the reserve ratio were higher, such as 0.25, the bank would have to hold more in reserves and could loan out less money, reducing its assets below the deposit amount.

(Table) SCENARIO: Assume That Empathy State Bank Begins with the Balance