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

Question

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

Quizplus · Accepted Answer

The bank's total deposits increased by $2,000, but the required reserves increased by $200 (10% of $2,000). Therefore, the excess reserves are $1,800 ($2,000 – $200). According to the money multiplier formula, the maximum amount the bank can lend out is equal to excess reserves multiplied by the money multiplier, which is 1/reserve requirement ratio. In this case, the money multiplier is 1/0.1 = 10, so the maximum loan the bank can make is $1,800 x 10 = $18,000.

Suppose a Transaction Changes a Bank's Balance Sheet as Indicated