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Exhibit: Reserves, Loans, and Money

-(Exhibit: Reserves, Loans, and Money) . The required reserve ratio is 10%. What is the maximum amount of new loans that Bolton bank can create and by how much can Bolton initially increase the money supply, assuming that newly created deposits are transferred to another bank?
A) $30 million; $30 million
B) $70 million; $30 million
C) $70 million; $70 million
D) $70 million; $700 million

Question

Use the following to answer questions .
Exhibit: Reserves, Loans, and Money
 
-(Exhibit: Reserves, Loans, and Money) . The required reserve ratio is 10%. What is the maximum amount of new loans that Bolton bank can create and by how much can Bolton initially increase the money supply, assuming that newly created deposits are transferred to another bank?
A) $30 million; $30 million 
B) $70 million; $30 million 
C) $70 million; $70 million 
D) $70 million; $700 million

Quizplus · Accepted Answer

The required reserve ratio is 10%, which means that Bolton Bank must hold 10% of its deposits as reserves. If Bolton Bank has $70 million in reserves, it can create $700 million in new loans (10% of $700 million is $70 million). If these newly created deposits are transferred to another bank, Bolton Bank's money supply will increase by $70 million.

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