People hold $400 million of bank deposits but no currency.Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements.Because of uncertainty,banks choose to hold $10 million more in reserves.The Fed takes no action.What happens to bank loans?
A)they fall $220 million
B)they fall $200 million
C)they rise $200 million
D)they rise $220 million

Question

Quizplus · Accepted Answer

The banks hold $10 million more in reserves than required, leaving them with $10 million less to loan out. Therefore, bank loans would fall by $200 million ($380 million original loans - $10 million extra reserves - $170 million required reserves = $200 million remaining loans).

People Hold $400 Million of Bank Deposits but No Currency