After getting an additional $5,000 in excess reserves, Bank A gives Sarah Smith a $5,000 student loan, which her school deposits in Bank B. If the reserve requirement is 20 percent, this $5,000 increase in Bank A's excess reserves will allow Bank A and Bank B together to make:
A) $5,000 in new loans.
B) $6,000 in new loans.
C) $9,000 in new loans.
D) $10,000 in new loans.

Question

Quizplus · Accepted Answer

The initial $5,000 deposit allows Bank A to loan out $4,000 (80% of $5,000, since 20% must be kept as reserves). When Sarah's school deposits the $5,000 in Bank B, Bank B can loan out $4,000 as well. Together, they can make $4,000 + $4,000 = $8,000 in new loans, plus the initial $5,000 loan, totaling $9,000.

After Getting an Additional $5,000 in Excess Reserves, Bank a Gives