The following question refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

-Bank X can safely increase its loans and investment by the amount of
A) $5,000,000.
B) $3,000,000.
C) $2,000,000.
D) $1,667,000.
E) $1,000,000.

Question

The following question refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:
 
-Bank X can safely increase its loans and investment by the amount of
A) $5,000,000. 
B) $3,000,000. 
C) $2,000,000. 
D) $1,667,000. 
E) $1,000,000.

Quizplus · Accepted Answer

Bank X's total reserves are $10,000,000 x 10% = $1,000,000. Its current reserves are $1,500,000, so it has excess reserves of $500,000. The maximum increase in loans and investments that Bank X can make without falling below the required reserve ratio is equal to the excess reserves divided by the reserve ratio. In this case, that is $500,000 / 0.10 = $5,000,000. Adding this amount to Bank X's loans and investments gives us $15,000,000. However, the question asks for the maximum increase in loans and investments that Bank X can make safely. To be safe, Bank X should keep its reserves greater than or equal to the required minimum. Therefore, the safe maximum increase in loans and investments is $15,000,000 - ($10,000,000 x 10%) = $15,000,000 - $1,000,000 = $14,000,000. Since Bank X's loans and investments are currently $12,000,000, the maximum increase it can make safely is $14,000,000 - $12,000,000 = $2,000,000.

The Following Question Refer to the Table That Follows