If the reserve requirement is 12 percent and banks desire to hold no excess reserves,when a bank receives a new deposit of $1,000,
A)it must increase its required reserves by more than $150.
B)its total reserves initially increase by $120.
C)it will be able to make new loans up to a maximum of $880.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

If the reserve requirement is 12%, and a bank receives a new deposit of $1,000, the bank must hold $120 ($1,000 x 0.12) in required reserves. This leaves $880 ($1,000 - $120) available for the bank to make new loans. Therefore, option C is correct. Option A is incorrect because increasing required reserves by 12% would equal just $120. Option B is also incorrect because the increase in total reserves would be equal to the increase in required reserves, which is $120.

If the Reserve Requirement Is 12 Percent and Banks Desire