If the required reserve ratio is 10%, a single bank can increase its loans by a maximum amount equal to:

Question

BlackTom AI · Accepted Answer

Banks may only lend out funds that exceed the required reserves; therefore the single bank’s maximum new lending equals its excess reserves.

1) Relevant concepts
- Required reserve ratio (rr): fraction of deposits banks must hold as reserves. Here rr = 0.10 (10%).
- Total reserves (TR) split into required reserves (RR = rr × Deposits) and excess reserves (E = TR − RR).
- A single bank cannot lend required reserves; it can only make loans up to its excess reserves. The money multiplier (1/rr) describes the banking system’s potential expansion, not a single bank’s immediate capacity.

2) Step-by-step reasoning
- Start from definitions: RR = rr × Deposits. Excess reserves E = TR − RR.
- Any loan reduces reserves immediately (until funds clear). A bank can only create loans from funds it already holds in excess of what it must keep.
- Therefore maximum additional loans Lmax for that bank = E.

3) Calculation (with an example)
- Let Deposits = $1,000 and TR = $150. Required reserves RR = 0.10 × $1,000 = $100. Excess reserves E = $150 − $100 = $50. The single bank can increase loans by up to $50 (its excess reserves).
- Note for comparison: the banking system could eventually expand deposits/loans by a total of 1/rr = 10 times the initial excess reserves, i.e., up to $500 system-wide. That is NOT the single bank’s immediate maximum.

4) Why the correct answer is correct
- Because required reserves must be held and cannot be lent, the bank’s lendable funds are precisely its excess reserves.

5) Why other options are incorrect
- (a) 10% of its excess reserves: too small — the bank can lend the whole excess, not just 10% of it.
- (c) its total reserves: incorrect because a portion (required reserves) cannot be lent.
- (d) 10 times its excess reserves: that is the system-wide multiplier effect, not the single bank’s maximum.

6) Conclusion
- The correct choice is b. its excess reserves, which matches the provided answer.

If the required reserve ratio is 10%, a single bank can increase its loans by a maximum amount equal to:单项选择题

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