Question

8000 x .05 a bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. if the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is

Answer 1

With an increase in the reserve requirement, the maximum amount of new loans that this bank can make is $2,000. Hence, Option B is correct.

What is the reserve requirement?

The amount that is required by a commercial bank to reserve from deposits in order to guarantee that there is always enough liquidity to meet customer withdrawals is known as the reserve requirement.

It refers to the portion of deposits that commercial banks are prohibited from lending against. In the given case, the amount of new loans that a bank can make is computed as follows:

The required reserve is given as follows:

Initial Required Reserve = 20% ∗ $40,000

Initial Required Reserve =$8,000

Now, when the required reserve increases to 25%, then the new required reserve is expressed as

New Required Reserve=25%∗$40,000

New Required Reserve=$10,000

Thus, the maximum amount that can now be given as loans is as follows:

Maximum Loan amount=$10,000−$8,000

Maximum Loan amount=$2,000

Thus, Option B is correct.

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The complete question is attache in text form:

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

a. $1,500.

b. $2,000.

c. $2,500.

d. $3,000.