Question

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?A) $2,000
B) $8,000
C) $10,000
D) $50,000

Answer 1

Answer:

Maximum money that bank can lend is  $50,000

Explanation:

Given data:

Amount deposit is $10,000

reserve ratio is 0.20

Maximum money that bank can lend is calculated as

maximum money = (deposit - reserve)× money multiplier

money multiplier $= \frac{1}{reserve\ ratio}$

money multiplier$= \frac{1}{0.20} = 5$

and reserve is zero hence

maximum money = (10,000 - 0)× 5

maximum money = $50,000