Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank.If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500,which of the following is true?

Question

Quizplus · Accepted Answer

The required reserve ratio is 0.1 or 10%, meaning that the bank is required to hold 10% of Linda's deposit, which is $400 ($4,000 x 0.1). Since the bank now holds $500 in reserves, they have exceeded the required reserves by $100, making it excess reserves. Therefore, the bank has $500 in total reserves and $4,100 in total deposits ($4,000 from Linda's deposit and $100 from excess reserves). Option A is incorrect because the bank could have used the $500 to meet its reserve requirements rather than lending it out. Option B is incorrect because the $500 exceeds the required reserves. Option D is incorrect because the bank's assets (reserves) rise by $500, but there is no corresponding increase in liabilities. Option E is the correct answer phrased differently, but it is best to specify what happened to the reserves (increased by $500) and what happened to the excess reserves (increased by $100).

Suppose the Required Reserve Ratio Is 0