If the reserve requirement is 25% and a bank initially receives $10,000 in deposits,the potential amount of loans is $40,000.

Question

Quizplus · Accepted Answer

The reserve requirement is the percentage of deposits that a bank is required to hold in reserve, either in its vaults or on deposit with the central bank, and cannot be lent out.

In this case, if the reserve requirement is 25%, the bank must hold 25% of the $10,000 in deposits, or $2,500, in reserves, leaving $7,500 available for lending.

Using the money multiplier formula, we can calculate the maximum potential amount of loans that can be created:

Loan amount = (1 / reserve requirement) x deposits 
Loan amount = (1 / 0.25) x $10,000 
Loan amount = $40,000

Therefore, the potential amount of loans that the bank can make is $40,000, making statement A true.

If the Reserve Requirement Is 25% and a Bank Initially