Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First National Bank has no excess reserves.If a new customer deposits $50,000,the bank could extend new loans up to a maximum of
A)$10,000.
B)$40,000.
C)$50,000.
D)$250,000.

Question

Quizplus · Accepted Answer

The reserve requirement of First National Bank is 20%, which means it needs to maintain a reserve of $10,000 (20% of $50,000 deposit). Therefore, it can only lend out $40,000 of the new deposit. This is calculated as:

Total reserves = Required reserves + Excess reserves
$0 = $10,000 + Excess reserves
Excess reserves = -$10,000

Since the bank has no excess reserves, it can only loan out up to the amount of required reserves, which is $10,000. Therefore, the maximum amount of new loans it can extend is $40,000 ($50,000 deposit - $10,000 required reserves).

Suppose All Banks Are Subject to a Uniform Reserve Requirement