Question

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively:________.
a. $30,000 and $150,000.
b. $50,000 and $250,000.
c. $50,000 and $500,000.
d. $100,000 and $500,000.

Answer 1

Answer:

b. $50,000 and $250,000.

Explanation:

The computation is shown below:

The required reserve is

= Check-able-deposit liabilities × reserve ratio

= $500,000 × 20%

= $100,000

The excess reserves is

= Actual reserves - required reserves

= $150,000 - $100,000

= $50,000

And, the amount that increase the loan is

= Excess reserves ÷ reserve ratio

= $50,000 ÷ 20%

= $250,000