Question

Assume that the reserve requirement is 20 percent. First National Bank has vault cash and deposits with the Fed of $80 million, loans and securities of $320 million, and demand deposits of $400 million. First National: a. ​ could extend a maximum of $10 million of additional loans. b. ​ could extend a maximum of $20 million of additional loans. c. ​ is not in a position to extend additional loans. d. ​ could extend a maximum of $40 million of additional loans.

Answer 1

Answer:

The answer is (c) First National Bank is not in a position to extend additional loans.

Explanation:

Please find the below for detailed explanation and calculations:

The First National Bank current reserve ratio is calculated as : Vault cash and deposits of the Bank with the Fed/ Total demand deposits of the Bank = $80 million / $400 million = 20%.

As the First National Bank' reserve ratio is now equal to the Fed's Reserve Requirement, First National Bank can not further extend its loan portfolio's balance, otherwise, its reserve ratio will fall below Fed's requirement which is not acceptable.

So, the answer is (c).