After getting an additional $5,000 in excess reserves, Bank A gives John Jones a $5,000 student loan, which his school deposits in Bank B. If the reserve requirement is 20 percent, this $5,000 increase in Bank A's excess reserves will allow Bank B to make:
A) no new loans.
B) $1,000 in new loans.
C) $3,200 in new loans.
D) $4,000 in new loans.

Question

Quizplus · Accepted Answer

When Bank B receives the $5,000 deposit, it must keep 20% ($1,000) as reserves but can lend out the remaining 80% ($4,000), hence allowing Bank B to make $4,000 in new loans.

After Getting an Additional $5,000 in Excess Reserves, Bank a Gives