Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First Guarantee 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 maximum amount of new loans the bank can extend is calculated by multiplying the deposit by the reciprocal of the reserve requirement: 
$50,000 x (1/0.20) = $250,000 
Since the bank has no excess reserves, it must hold $10,000 in reserves ($50,000 x 0.20 = $10,000), leaving a maximum of $40,000 in new loans that can be extended. Therefore, the correct answer is B.

Suppose All Banks Are Subject to a Uniform Reserve Requirement