Question

Suppose a bank already has excess reserves of $800 and the reserve ratio is 30%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Melanie, that bank can lend an additional:________


a. $200.

b. $1,000

c. $800.

d. $2,400.

e. $400

Answer 1

Answer:

The correct answer is $900.

Explanation:

According to the scenario, computation of the given data are as follows:

Reserve required = New deposits of cash × Reserve ratio%

= $1000 × 30/100

=$300

Excess reserve from Andy ‘s deposit = New deposit – Reserve required  

= $1,000 – $300

= $700

Total reserve excess = New reserve excess + Old reserve excess

= $700 + $800

= $1,500

After lending to molly excess reserve = Total reserve excess – Amount lending to molly

= $1,500 - $600

= $900

The bank has only $900 excess reserve. So, Bank can only give $900 for lending.