Table 11-3.

-Refer to Table 11-3. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be
A) $320.
B) $400.
C) $680.
D) $750.

Question

Table 11-3.
 
-Refer to Table 11-3. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be
A) $320. 
B) $400. 
C) $680. 
D) $750.

Quizplus · Accepted Answer

The initial reserve ratio is 20% (reserves of $80 divided by deposits of $400). When the bank receives a deposit of $500, its reserves will increase by $500 * 20% = $100. The total reserves will then be $180.

In order to keep the reserve ratio unchanged, the bank needs to increase its loans by the same amount as the increase in reserves, which is $100. Therefore, the bank will make new loans of $400 ($100 divided by the reserve requirement ratio of 25%). Hence the correct answer is B.

Table 11-3. -Refer to Table 11-3. Starting from the Situation as Depicted