Question

If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $10, then this bank

A. must increase its required reserves by $10.

B. will initially see its total reserves increase by $10.50.

C. will be able to make new loans up to a maximum of $9.50.

D. All of the above are correct.

Answer 1

As the reserve requirement is 5 percent, so when the bank has received a deposit of $10, it needs to hold ($10 * 0.05) = $0.50 as reserve.

Now, we as we knew that, bank desires to hold no excess reserve, that means, the bank can lend out the amount after deducting the amount required to reserve.

So, here, the bank can lend out ($10 - $0.50) = $9.50.

So, the correct option is

C. will be able to make new loans upto a maximum of $9.50.