An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by

Question

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The required reserve ratio is 10 percent, which means the bank must hold $1,200 on reserve. The remaining $10,800 can be used to increase the loan capacity of the bank. Therefore, the deposit increases the loan capacity by $10,800.

An Individual Deposits $12,000 in a Commercial Bank