Exhibit 19-1 Balance sheet of First Iliad State Bank

-In Exhibit 19-1,if the required reserve ratio is raised to 18 percent,then First Iliad State will:
A) have to convert loans worth $800,000 to required reserves.
B) have to convert loans worth $200,000 to required reserves.
C) be able to make additional loans worth $800,000.
D) be able to make additional loans worth $200,000.

Question

Exhibit 19-1 Balance sheet of First Iliad State Bank
 
-In Exhibit 19-1,if the required reserve ratio is raised to 18 percent,then First Iliad State will:
A) have to convert loans worth $800,000 to required reserves. 
B) have to convert loans worth $200,000 to required reserves. 
C) be able to make additional loans worth $800,000. 
D) be able to make additional loans worth $200,000.

Quizplus · Accepted Answer

If the required reserve ratio is raised to 18%, then the bank will have to increase its required reserves by the difference between the new and the old required reserve ratio, which is (18% - 12%) * $1,000,000 = $60,000. Since the bank currently has $40,000 in required reserves, it will need to convert an additional $20,000 of its assets into required reserves. The only option for conversion is loans, and therefore the bank will have to convert loans worth $20,000 ($1,000,000 * 2% * 10/12). Therefore, the correct answer is B.

Exhibit 19-1 Balance Sheet of First Iliad State Bank