Question

A commercial bank holds $500,000 in checkable deposits liabilities and $120,000 in reserves. If the required reserve ratio is 20%, which of the following is the maximum amount by which this single commercial bank and the maximum amount by which the banking system can increase loans? a Amount created by Single Bank: $5,000 and Amount Created by Banking System: $25,000 b Amount created by Single Bank $20,000 and Amount Created by Banking System $80,000 c Amount created by Single Bank $120,000 and Amount Created by Banking System $500,000 d Amount created by Single Bank $30,000 and Amount Created by Banking System $100,000 e Amount created by Single Bank $20,000 and Amount Created by Banking System $100,000

Answer 1

Answer: E.) Amount created by Single Bank $20,000 and Amount Created by Banking System $100,000

Explanation:

The required reserve ratio = 20%

Checkable deposit liabilities = $500,000

Reserve = $120,000

The required reserve refers to a designated percentage of a commercial bank's deposit which is the minimum that must be held by a commercial bank. Regulation is usuay pronounced by the central bank of the nation.

Banking system loan increase :

Reserve ratio × Checkable deposit liabilities

20% × $500,000 = 100,000

Commercial bank maximum

Reserve amount - required reserve amount

$120,000 - (0.2 × 500,000)

$120,000 - $100,000 = $20,000