Question

Assume the Aim-to-Drain plumbing company deposits $200,000 in cash in First National Bank. If the bank has no excess reserves at the time of the deposit and the required reserve ratio (R) is 25 percent, then First National can now lend:

a. $200,000

b. $150,000

c. $50,000

d. $75,000

Answer 1

A bank can lend its excess reserve at the most. Each time there is a new deposit, the reserve of the bank increases by the same amount. part of this is kept as required reserve and rest is termed as an excess reserve. The bank loans out this excess reserve.

In this case, the required reserve ratio is 25%. The for a deposit of $200000 the required reserve is 25% of the $200000 or $50000. Then the excess reserve of the bank is $150000. Hence the bank now can lend $150000.

Therefore, the correct option is: b) $150,000