Table 10.2
-Refer to Table 10.2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent.As a result of the transaction, the bank can make a maximum loan of

Question

Table 10.2 
-Refer to Table 10.2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent.As a result of the transaction, the bank can make a maximum loan of

Quizplus · Accepted Answer

The desired reserve ratio is 10%, which means the bank is required to hold 10% of its deposits as reserves. From the T-account, we can see that the bank's reserves are $800 and its deposits are $8,000. This means that the required reserves are $800 x 10% = $80. Therefore, the bank has excess reserves of $800 - $80 = $720. According to the money multiplier formula, the maximum loan the bank can make is equal to its excess reserves multiplied by the money multiplier. The money multiplier is 1/required reserve ratio, which is 1/10% = 10. Therefore, the maximum loan the bank can make is $720 x 10 = $7,200 (Choice C).

Table 10.2 -Refer to Table 10.2.Suppose a Transaction Changes a Bank's Balance