Table 16-3.
-Refer to Table 16-3. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be
A)$320.
B)$400.
C)$680.
D)$750.

Question

Table 16-3. 
-Refer to Table 16-3. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be
A)$320. 
B)$400. 
C)$680. 
D)$750.

Quizplus · Accepted Answer

The initial reserve requirement is 20% of deposits, so the bank has $1000 in reserves. When the deposit of $500 is made, the bank's deposits increase to $3000, and its required reserves increase to $600. Thus, the excess reserves increase by $500-$200=$300. If the bank wants to maintain a reserve ratio of 20%, then it needs to keep $600 in required reserves, which means it can lend out the excess reserves, which have increased by $300. The maximum amount of new loans that the bank can make, while still maintaining its required reserves, is $300/(1-20%) = $375. However, the bank can only loan out whole dollars, so the maximum amount of new loans that it can make is $400.

Table 16-3. -Refer to Table 16-3. Starting from the Situation as Depicted