Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. First National Bank can make new loans of up to
A) $50,000.
B) $41,000.
C) $32,000.
D) $27,000.

Question

Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. First National Bank can make new loans of up to
A) $50,000. 
B) $41,000. 
C) $32,000. 
D) $27,000.

Quizplus · Accepted Answer

The reserve requirement is 15 percent, therefore the bank must keep 15% of its total deposits as reserves. Total deposits are $200,000, so the required reserves are $30,000 ($200,000 x 0.15). The bank already has $27,000 in reserves, so it can make new loans of up to $203,000 ($200,000 - $30,000 + $27,000). However, it must keep a reserve of 15% of any new loans it makes, so it can only lend out $32,000 ($203,000 x 0.15). Therefore, the maximum new loans the bank can create is $32,000.

Refer to the Accompanying Balance Sheet for the First National