$$\begin{array} { | l | c | }
\hline \text { Reserves } & \$ 100 \
\hline \text { Checkable Deposits } & 1,000 \
\hline \text { Loans (to customers) } & 300 \
\hline \text { Property } & 400 \
\hline \text { Securities (owned) } & 300 \
\hline \text { Stock Shares } & 100 \
\hline
\end{array}$$ Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by
A) $100.
B) $90.
C) $900.
D) $1,000.

Question

$$\begin{array} { | l | c | } 
\hline \text { Reserves } & \$ 100 \
\hline \text { Checkable Deposits } & 1,000 \
\hline \text { Loans (to customers) } & 300 \
\hline \text { Property } & 400 \
\hline \text { Securities (owned) } & 300 \
\hline \text { Stock Shares } & 100 \
\hline
\end{array}$$ Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by
A) $100.
B) $90.
C) $900.
D) $1,000.

Quizplus · Accepted Answer

When a bank receives a deposit, it must keep a fraction of the deposit as reserves (assuming a reserve requirement of 10% in this context) and can loan out the rest. The initial $100 deposit allows Moolah Bank to keep $10 as reserves and loan out $90. However, this $90, when deposited in banks, can be loaned out again after keeping 10% in reserves, and the process continues. The total potential increase in loans is calculated using the money multiplier formula, which is 1/reserve ratio. With a 10% reserve requirement, the multiplier is 1/0.1 = 10. Therefore, the banking system can expand loans by $100 * 10 = $900 in total.

Refer to the Accompanying Table of Information for the Moolah