The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent. Refer to the above information. This bank can safely expand its loans by a maximum of:
A) $20,000
B) $40,000
C) $100,000
D) $200,000

Question

The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent.  Refer to the above information. This bank can safely expand its loans by a maximum of:
A) $20,000 
B) $40,000 
C) $100,000 
D) $200,000

Quizplus · Accepted Answer

The maximum amount that the bank can safely expand its loans by is equal to the excess reserves, which is calculated by subtracting the required reserves from the total reserves.

Total reserves = $200,000 
Required reserves = 20% of deposits = 20% of ($600,000 + $200,000) = $160,000

Excess reserves = Total reserves - Required reserves = $40,000

Therefore, the bank can safely expand its loans by a maximum of $40,000 without falling below the required reserve ratio.

The Balance Sheet Below Is for the First Federal Bank