# ECONOMICS (CBSE/UGC NET)

## ECONOMICS

### MONEY

 Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Young Metro begins trusting banks and he deposits \$10, 000 in his. The reserve requirement is 20%. How much can his bank now lend out?
 A \$10, 000 B \$2, 000 C \$8, 000 D \$0
Explanation:

Detailed explanation-1: -If the Fed sells \$10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can: decrease the money supply by up to \$50 million.

Detailed explanation-2: -A reserve requirement of 20 percent means a bank must have \$1, 000 of reserves if its checkable deposits are: \$5, 000. The amount that a commercial bank can lend is determined by its: excess reserves.

Detailed explanation-3: -This means the bank has to reserve 20% of the deposits and can not use this fund for any commercial purpose. The other 80% can be used for commercial purposes, such as loans, lending, investments, etc.

Detailed explanation-4: -The maximum amount that the bank can lend is 2000 since reserves are 20 percent of the checkable deposit, which means that \$20, 000 of reserves is to be maintained by the bank (20% of 1, 00, 000). Thus, the amount they can loan is 22, 000-20, 000=2000. This will increase the checkable deposits and loans by 2000.

There is 1 question to complete.