Bank A now loans out the maximum it can to Mr.Smith.Compared to its position just after the deposit of $10,000 in newly printed currency,bank A now has
A) demand deposits up by an additional $10,000.
B) reserves up by an additional $1,250.
C) assets up by an additional $10,000.
D) loans and investments up by $8,750.
E) net worth up by an additional $1,250.

Question

Quizplus · Accepted Answer

When a bank loans out the maximum it can, its loans and investments increase by the amount it can loan out after accounting for the reserve requirement. Assuming a reserve requirement of 12.5%, from a $10,000 deposit, the bank must keep $1,250 (12.5% of $10,000) in reserves and can loan out the remaining $8,750. This action increases its loans and investments by $8,750, not its demand deposits, reserves, total assets, or net worth directly by the amounts specified in the other options.

Bank a Now Loans Out the Maximum It Can to Mr.Smith.Compared