Assume that Company XYZ deposits $500,000 in cash in the Bank of New Brunswick.If the bank had no excess reserves before the deposit was made and the target reserve ratio is 20 percent,what is the maximum amount of new loans that the bank can now offer?

Question

Quizplus · Accepted Answer

The target reserve ratio is 20%. Therefore, the bank must keep 20% of the $500,000 deposit as required reserves, which is $100,000. The remaining $400,000 can be loaned out as new loans. Therefore, the maximum amount of new loans the bank can offer is $400,000.

Assume That Company XYZ Deposits $500,000 in Cash in the Bank