Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit and has a check
Cleared against it for that amount, its reserves and checkable deposits will now be
A) $25,000 and $122,000, respectively.
B) $22,000 and $110,000, respectively.
C) $32,000 and $115,000, respectively.
D) $22,000 and $105,000, respectively.

Question

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit and has a check
Cleared against it for that amount, its reserves and checkable deposits will now be
A) $25,000 and $122,000, respectively. 
B) $22,000 and $110,000, respectively. 
C) $32,000 and $115,000, respectively. 
D) $22,000 and $105,000, respectively.

Quizplus · Accepted Answer

The bank currently has excess reserves of $20,000 ($30,000 in reserves minus required reserves of $10,000). The bank can loan out all of its remaining excess reserves of $20,000 and create a new checkable deposit for that amount, increasing its checkable deposits to $110,000 ($90,000 + $20,000).

Since the required reserve ratio is 20%, the bank is required to hold 20% of its checkable deposits as reserves. Therefore, the required reserves will be $22,000 ($110,000 x 20%).

The bank already has $30,000 in reserves, so it only needs to acquire an additional $22,000 - $10,000 = $12,000 in reserves. The new checkable deposit of $20,000 will have an initial deposit of $20,000 x 20% = $4,000 in required reserves. The bank's reserves will increase to include both the $4,000 in required reserves for the new deposit, and the additional $8,000 needed to reach the required reserve level, for a total of $22,000 in reserves.

Therefore, after the loan is made and the check is cleared, the bank's reserves will be $22,000 and its checkable deposits will be $110,000. Answer choice B is correct.

Refer to the Accompanying Balance Sheet for the ABC National