Suppose a bank has $10 million in deposits with no excess reserves, and the reserve requirement is 20%. If the Fed reduces the reserve requirement to 5%, the bank can make a maximum loan of

Question

Quizplus · Accepted Answer

Initially, with a 20% reserve requirement on $10 million in deposits, the bank must hold $2 million (20% of $10 million) in reserves. If the reserve requirement is reduced to 5%, the bank now needs to hold only $0.5 million (5% of $10 million) in reserves. This reduction in the reserve requirement frees up $1.5 million ($2 million - $0.5 million) that the bank can now lend out.

Suppose a Bank Has $10 Million in Deposits with No