Question

A single commercial bank must meet a 25% reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of

Answer 1

Answer:

The bank can increase loans by a maximum of $1500.

Explanation:

There is no excess reserve.  

The reserve requirement is 25%.  

The total reserves are increased by $2,000.  

The required reserve will be 25% of $2,000.

=(25/100)*2000

=0.25*2000

=500

So, the required reserve is $500.  

The loan can be increased by

=Increase in total reserve-required reserve

=$(2000-500)

=$1,500

So, the banks can increase loans up to $1,500.