Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:
A) $10.
B) $90.
C) $100.
D) $1,000.

Question

Quizplus · Accepted Answer

The bank is required to hold 10% of the new deposit ($10) in reserves and can lend out the rest ($90). This is because of the 10% reserve requirement. The bank cannot lend out the entire new deposit of $100 because it must hold the required amount of reserves. Therefore, the correct answer is B.

Assume We Have a Simplified Banking System in Balance-Sheet Equilibrium