Exhibit 19-1 Balance sheet of First Iliad State Bank In Exhibit 19-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:
A) have to convert loans worth $800,000 to required reserves
B) have to convert loans worth $200,000 to required reserves.
C) be able to make additional loans worth $800,000.
D) be able to make additional loans worth $200,000.
E) not have to act.

Question

Exhibit 19-1  Balance sheet of First Iliad State Bank  In Exhibit 19-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:
A) have to convert loans worth $800,000 to required reserves 
B) have to convert loans worth $200,000 to required reserves. 
C) be able to make additional loans worth $800,000. 
D) be able to make additional loans worth $200,000. 
E) not have to act.

Quizplus · Accepted Answer

According to the balance sheet, the bank's total deposits are $10,000,000, and the required reserve ratio is currently 10%, meaning the bank must hold $1,000,000 in required reserves. If the required reserve ratio is lowered to 8%, the new required reserve would be $800,000 (8% of $10,000,000). The bank currently holds $1,200,000 in required reserves (as shown in the balance sheet), so they have excess reserves of $200,000. This means they can use that $200,000 for additional loans, and with the lower required reserve ratio, they can make loans worth up to $800,000 (which is the difference between their excess reserves and the new required reserve amount of $800,000). Therefore, the correct answer is D: the bank will be able to make additional loans worth $200,000.

Exhibit 19-1 Balance Sheet of First Iliad State Bank in Exhibit