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Suppose that the banking industry is competitive and it has zero equity.The effective legal reserve requirement is 25%.Assume that there are three banks, A, B, and C.Bank A initially receives $2,500 in deposits.
-Suppose that the effective legal reserve requirement is now 40%.Bank A loans out its excess reserves, which are deposited in Bank B.How much excess reserves does Bank B have?
A)$1,500
B)$1,000
C)$900
D)$750
E)$600

Question

Use the following information for questions 
Suppose that the banking industry is competitive and it has zero equity.The effective legal reserve requirement is 25%.Assume that there are three banks, A, B, and C.Bank A initially receives $2,500 in deposits.
-Suppose that the effective legal reserve requirement is now 40%.Bank A loans out its excess reserves, which are deposited in Bank B.How much excess reserves does Bank B have?
A)$1,500
B)$1,000
C)$900
D)$750
E)$600

Quizplus · Accepted Answer

With a 40% reserve requirement, Bank A must keep 40% of $2,500, which is $1,000, as reserves. It can loan out the remaining $1,500. When this $1,500 is deposited into Bank B, Bank B must keep 40% of $1,500 as reserves, which is $600. Therefore, Bank B's excess reserves are $1,500 - $600 = $900.

Use the Following Information for Questions