Assume that a commercial bank has no excess reserves initially and $20,000 cash is deposited in the bank.If the target reserve ratio is 20 percent,what is the maximum by which the bank can now increase its loans?

Question

Quizplus · Accepted Answer

If the target reserve ratio is 20 percent, the bank is required to hold 20 percent of the $20,000 deposit as reserves, which is $4,000. Therefore, the maximum amount by which the bank can increase its loans is $16,000 ($20,000 deposit minus $4,000 required reserves). Hence, the correct answer is (D) $16,000.

Assume That a Commercial Bank Has No Excess Reserves Initially