Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of:
A) $10.
B) $90.
C) $100.
D) $1,000.

Question

Quizplus · Accepted Answer

When a bank receives a new deposit of $100 and is subject to a 10 percent reserve requirement, it must keep $10 (10% of $100) as reserves and can lend out the remaining $90. This is because the reserve requirement dictates the fraction of deposits that must be kept on hand, with the rest available for loans.

Assume We Have a Simplified Banking System in Balance-Sheet Equilibrium