Suppose that a bank does NOT hold excess reserves and the reserve ratio is 20%.If Molly deposits $1 000 of cash in her chequing account and the bank lends $600 to Freda,the bank can lend an additional:

Question

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When Molly deposits $1 000 cash, the bank can hold onto $200 as required reserves (20% of $1 000) and lend out the remaining $800. When the bank lends $600 to Freda, the bank must keep $120 (20% of $600) as required reserves and can lend out the remaining $480. Therefore, the bank can lend an additional $480, which is choice B) $200.

Suppose That a Bank Does NOT Hold Excess Reserves and the Reserve