First Safety, a commercial bank, has $6,000,000 of outstanding demand deposits and actual reserves of $1,700,000. If the reserve ratio is 25 percent, what is the maximum amount of new loans the bank can extend?

Question

Quizplus · Accepted Answer

The reserve ratio is given as 25 percent, which means that for every dollar of demand deposits, the bank is required to hold 25 cents in actual reserves.

Actual reserves = Reserve Ratio x Demand deposits

$1,700,000 = 0.25 x $6,000,000

To find the maximum amount of new loans that the bank can extend, we need to subtract the required reserves from the actual reserves:

Maximum new loans = Demand deposits - Required reserves

Maximum new loans = $6,000,000 - $1,500,000 (25% of $6,000,000)

Maximum new loans = $4,500,000

Therefore, the maximum new loans the bank can extend is $200,000 (Choice C).

First Safety, a Commercial Bank, Has $6,000,000 of Outstanding Demand