Table 11-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below.

-Refer to Table 11-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
A) $866.67.
B) $1,666.67.
C) $2,000.00.
D) an infinite amount.

Question

Table 11-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below.
 
-Refer to Table 11-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
A) $866.67. 
B) $1,666.67. 
C) $2,000.00. 
D) an infinite amount.

Quizplus · Accepted Answer

The reserve ratio for this bank is 10% ($1,000/$10,000), and an increase in reserves of $150 would increase the maximum amount the bank can lend out by $1,500. If all banks have the same reserve ratio, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by $2,000 (($150/.10) x 10 = $1,500 x 1.33 multiplier = $2,000). Therefore, the correct answer is C.