The desired reserve ratio is 10 percent.A bank with $100 million in deposits has $5 million in vault cash,$6 million on deposit with the Bank of Canada,government securities of $9 million,and other assets of $80 million.If someone deposits a cheque for $1 million in the bank,the maximum loan the bank can now make is

Question

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The bank's total reserves are the sum of its vault cash and deposits with the Bank of Canada, which is $5 million + $6 million = $11 million.

The bank's required reserves are 10% of its total deposits, which is 0.10 x $100 million = $10 million.

This means the bank has excess reserves of $11 million - $10 million = $1 million.

When the bank receives the $1 million deposit, its total deposits will increase to $101 million. Its required reserves will increase to 0.10 x $101 million = $10.1 million. Its excess reserves will be $11 million - $10.1 million = $0.9 million.

The maximum loan the bank can now make is its excess reserves, which is $0.9 million.

Therefore, the best choice is C) $1.9 million, which is the sum of the original excess reserves ($1 million) and the additional excess reserves after the deposit ($0.9 million).

The Desired Reserve Ratio Is 10 Percent