Table 21-3.

-Refer to Table 21-3.Starting from the situation as depicted by the T-account,if someone deposits $500 into the First Bank of Fairfield,and if the bank makes new loans so as to keep its reserve ratio unchanged,then the amount of new loans that it makes will be
A) $320.
B) $400.
C) $680.
D) $750.

Question

Table 21-3.
 
-Refer to Table 21-3.Starting from the situation as depicted by the T-account,if someone deposits $500 into the First Bank of Fairfield,and if the bank makes new loans so as to keep its reserve ratio unchanged,then the amount of new loans that it makes will be
A) $320. 
B) $400. 
C) $680. 
D) $750.

Quizplus · Accepted Answer

First, we need to determine the bank's reserve ratio. The reserve ratio is the amount of reserves held by the bank (in this case, $800) divided by the total deposits (in this case, $2,000). So, the reserve ratio is:

$800 / $2,000 = 0.4 or 40%

If the bank wants to keep its reserve ratio unchanged, it must hold onto 40% of any new deposits. So, if someone deposits $500, the bank must keep:

$500 x 0.4 = $200

This leaves the bank with $300 in excess reserves ($500 - $200 = $300). The bank can use these excess reserves to make new loans. To determine how much new loans the bank can make, we need to use the money multiplier formula:

Money Multiplier = 1 / Reserve Ratio

In this case, the reserve ratio is 0.4, so the money multiplier is:

1 / 0.4 = 2.5

This means that every $1 in excess reserves can support $2.5 in new loans. In this case, the bank has $300 in excess reserves, so it can make:

$300 x 2.5 = $750 in new loans

Therefore, the correct answer is B) $400.

Table 21-3. -Refer to Table 21-3.Starting from the Situation as Depicted by Situation