Question

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is 

A) $30,000. 

B) $25,000. 

C) $20,000. 

D) $10,000.

Answer 1

Checkable Deposits = $100,000

Reserved Ration (r.r) = 20% = 0.2

Reserves = $40,000

We can find out Maximum Deposit outflow that can sustain without altering balance from using the following formula:

(Reserve – (Reserve Ratio x Deposits)) / 1 - Reserve Ratio

= ($40,000 – (0.2 x $100,000)) / (1 -0.2)

= ($40,000 – $20,000) / 0.8

= $20,000 / 0.8

= $25,000

Answer 2

A bank can lend equal to its excess reserves

required reserves =deposits * reserves ratio

=100000*0.2

=20000

excess reserves =total reserves -required reserves

=40000-20000

=$20000

the bank can lend $20000

Option C