Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a n

Question

Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is A. $ 10 000. B. $ 90 000. C. $ 1000. D. $100 000. E. $900 000. Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20% and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of A. $2000. B. $500. C. $1200. D. $200. E. $120.

Explanation / Answer

(1) (B)

Largest new loan = $100,000 x (100 - 10)% = $100,000 x 90% = $90,000

(2) (B)

Increase in money supply = $100 / 0.20 = $500

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