Question

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $500 to Molly. That bank can lend an additional:

Answer 1

Answer: Bank can lend an additional $1100.

Explanation:

Given that,

Bank's initial excess reserves = $800

Reserve ratio = 20%

New deposits = $1,000

Required reserves = 20% of 1000 = $200

So, the banks have to keep $200 in reserves and can lend rest $800.

As given in the question that bank lends $500 to molly and has an excess reserves of $800, so the bank can lend an additional $1100.