Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent.If the Federal Reserve reduces the required reserve ratio to 4 percent,then the bank can make a maximum loan of

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With a required reserve ratio of 10%, the bank must hold $10 million (10% of $100 million) in reserves. If the ratio is reduced to 4%, the bank now needs to hold only $4 million (4% of $100 million) in reserves. This reduction frees up $6 million ($10 million - $4 million) that the bank can now lend out.

Suppose a Bank Has $100 Million in Checking Account Deposits