Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $10,000. What would be the maximum amount of loan that could be made by the system?

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Quizplus · Accepted Answer

The maximum amount of loan that could be made by the system would be calculated by subtracting the required reserve ratio (20%) from 100%, leaving 80% available for loans. This means that the maximum loan that could be made would be (0.8 * $10,000) = $8,000. Therefore, the total amount of money in the system would be $18,000 ($10,000 deposit + $8,000 loan). To find the limit of the loan, the process can be repeated with the new total amount; (0.8 * $18,000) = $14,400. Continuing this process, the maximum amount of loan that could be made would eventually converge to $40,000. Therefore, the best choice is B.

Assume That a Banking System Must Keep Reserves of 20