With a 10% reserve requirement, a $100 deposit allows the bank to lend:

Question

BlackTom AI · Accepted Answer

With a 10% reserve requirement, the bank must hold $10 of a $100 deposit and can use the remainder to make loans.

1) Relevant knowledge points and concepts
- Fractional-reserve banking: banks keep a fraction of deposits as reserves and lend out the rest.
- Reserve requirement (reserve ratio): the fraction of deposits banks are legally required to hold, here 10% (0.10).
- Required reserves vs. excess reserves: Required reserves = reserve ratio × deposit; Excess reserves = deposit − required reserves (amount available to lend).
- Money multiplier (optional concept): 1 / reserve ratio = 10 here, which governs total potential money creation over many rounds, but the immediate lendable amount is calculated below.

2) Step-by-step reasoning
- Start with the deposit: $100.
- Compute required reserves: required = reserve ratio × deposit = 0.10 × $100.

3) Calculations (intermediate steps shown)
- required reserves = 0.10 × $100 = $10.
- excess reserves (lendable) = deposit − required reserves = $100 − $10 = $90.

4) Why the correct answer is correct
- The bank must keep $10 on hand and may lend the remaining $90. That $90 is the immediate loanable funds from this deposit under a 10% reserve requirement.

5) Why the other options are incorrect
- a. $110: impossible as an initial loan because the bank cannot lend more than total deposits minus required reserves; lending $110 would exceed the $100 deposit.
- b. $100: would imply a 0% reserve requirement (keeping nothing), which contradicts the 10% rule.
- d. $10: equals the required reserve, not the amount available to lend.

6) Conclusion
- Therefore, with a 10% reserve requirement on a $100 deposit, the bank can lend $90, which matches the provided correct answer (c. $90).

With a 10% reserve requirement, a $100 deposit allows the bank to lend:Single choice

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