ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -The deposit multiplier is the inverse of the reserve requirement ratio. For example, if the bank has a 20% reserve ratio, then the deposit multiplier is 5, meaning a bank’s total amount of checkable deposits cannot exceed an amount equal to five times its reserves.

Detailed explanation-3: -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-4: -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.