1. If the reserve requirement is 12 percent and banks desire to hold no excess r

ID: 2496101 • Letter: 1

Question

1. If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000,

a. it must increase its required reserves by more than $150.

b. its total reserves initially increase by $120.

c. it will be able to make new loans up to a maximum of $880.

d. None of the above is correct.

2. If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

a. $8,000 of new money.

b. $16,000 of new money.

c. $32,000 of new money.

d. None of the above is correct.

Please explain the reason

1. c. it will be able to make new loans up to a maximum of $880.

Explanation:

Required Reserve will be $120 , i.e. 12% of $1000. Thus. after keeping the Required Reserve $880 will be left for loan.

2. b. $16,000 of new money.

Explanation:

Multiplier = 1/RR = 1/0.125 = 8

=> 8 * 2,000 = $16,000 of money created

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