A bank has excess reserves of $5,000 and demand deposits of $50,000; the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of
A) $1,000.
B) $1,500.
C) $2,000.
D) $2,500.

Question

Quizplus · Accepted Answer

Required reserves = demand deposits x required reserve ratio
At a 20% required reserve ratio, the required reserves would be:
$50,000 x 0.20 = $10,000
Excess reserves = actual reserves - required reserves
$5,000 = actual reserves - $10,000
Actual reserves = $15,000

If the reserve ratio is increased to 25%, then the new required reserves would be:
$50,000 x 0.25 = $12,500

Excess reserves = actual reserves - required reserves
$5,000 = actual reserves - $12,500
Actual reserves = $17,500

The maximum amount the bank can lend is equal to the excess reserves:
$17,500 - $10,000 = $7,500
However, the question asks for the maximum amount the bank can lend after the reserve ratio is increased, so we need to subtract the amount the bank can no longer lend due to the increase in required reserves:
$7,500 - ($12,500 - $10,000) = $2,500.

Therefore, the correct answer is D.

A Bank Has Excess Reserves of $5,000 and Demand Deposits