Suppose that banks desire to hold no excess reserves.If the reserve requirement is 5 percent and a bank receives a new deposit of $400,it
A) must increase required reserves by $20.
B) will initially see reserves increase by $400.
C) will be able to use this deposit to make new loans amounting to $380.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

If banks desire to hold no excess reserves, they will aim to have their reserves equal to the required reserves, and hence they will have to use the new deposit of $400 to increase their required reserves by $20 (5% of $400). This means that they will initially see reserves increase by $400, but they will have to hold onto $20 of it, leaving them with $380 that they can use to make new loans.

Suppose That Banks Desire to Hold No Excess Reserves