Initially a bank has a minimum reserve requirement of 20 percent and no excess reserves.If $20,000 is deposited in the bank,then the bank can,ceteris paribus:
A) Lend $20,000.
B) Lend $16,000.
C) Hold $20,000 less in excess reserves.
D) Reduce its required reserves by $20,000.

Question

Quizplus · Accepted Answer

If the bank has a minimum reserve requirement of 20%, it means that it has to hold 20% of its deposits as reserves, and it can only lend out the remaining 80%.
Initially, the bank has no excess reserves, so all of its reserves are required reserves. When $20,000 is deposited, the bank has to hold 20% of that amount, which is $4,000, as required reserves. The remaining $16,000 can be lent out.
Therefore, the best choice is B: Lend $16,000.

Initially a Bank Has a Minimum Reserve Requirement of 20