Lucretia deposits $2, 000 into a savings account when the bank has 50 million in reserves. If the Fed requires a 20 percent reserve ratio, how much of Lucretias money can the bank lend?(Prior to the March 15 announcement, the Fed had just updated its reserve requirement table on January 16, 2020. 2 It required that all banks with more than $127.5 million on deposit maintain a reserve of 10% of deposits.All banks with less than $127.5 million on deposit maintain a reserve of 20% of deposits.)

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

Lucretia deposits $2, 000 into a savings account when the bank has 50 million in reserves. If the Fed requires a 20 percent reserve ratio, how much of Lucretia’s money can the bank lend?(Prior to the March 15 announcement, the Fed had just updated its reserve requirement table on January 16, 2020. 2 It required that all banks with more than $127.5 million on deposit maintain a reserve of 10% of deposits.All banks with less than $127.5 million on deposit maintain a reserve of 20% of deposits.)

A	$1, 200
B	$2, 000
C	$1, 600
D	$400

Explanation:

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: -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-3: -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-4: -The required reserve ratio can be calculated by simply dividing the amount of money a bank is required to hold in reserve by the amount of money it has on deposit. For example, if a bank has $10 million in deposits and $500, 000 are required to be held in reserve, then the required reserve ratio would be 1/20 or 5%.

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ECONOMICS (CBSE/UGC NET)

ECONOMICS

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