Callie withdraws $600 from her bank account, which the bank had already loaned out to customers. If the reserve requirement is 15%, by how many dollars must her bank reduce its lending?

Question

Quizplus · Accepted Answer

If Callie withdraws $600 from her account, that means her bank has $600 less in reserves. The reserve requirement is 15%, which means the bank must hold onto 15% of its deposits in reserves and can lend out the rest.

So, the bank must reduce its lending by the same amount as the withdrawn money that was originally loaned out, which would be:

$600 (withdrawn money) / (1 - 0.15) (what is left to lend out after the reserve requirement) = $705.88

Therefore, the bank must reduce its lending by $705.88 - $600 (withdrawn money) = $105.88.

Answer B, $510, is the closest to this calculated value.

Callie Withdraws $600 from Her Bank Account, Which the Bank