Table 14-2

-Refer to Table 14-2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank can make a maximum loan of
A)$0.
B)$800.
C)$7,200.
D)$8,000.

Question

Table 14-2
 
-Refer to Table 14-2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank can make a maximum loan of
A)$0. 
B)$800. 
C)$7,200. 
D)$8,000.

Quizplus · Accepted Answer

The transaction increases the bank's reserves by $800. With a 10 percent reserve requirement, the bank must keep $80 as reserves for this new deposit, allowing it to loan out the remaining $720. However, the question asks for the maximum loan the bank can make as a result of the transaction, not just from the immediate increase in reserves. The bank's total reserves increase by $800, and with a 10% reserve requirement, the bank can ultimately support additional loans totaling 10 times the increase in reserves, because each dollar of reserves supports $10 of loans. Therefore, the bank can make a maximum loan of $8,000 - $800 (the initial reserve increase) = $7,200.

Table 14-2 -Refer to Table 14-2.Suppose a Transaction Changes a Bank's Balance