Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank.If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500,which of the following is true?

A) The bank must have lent out an additional $4,000.
B) $500 is the value of the bank's required reserves.
C) The bank now has excess reserves of $100.
D) Both the bank's assets and its liabilities rise by $500.
E) The bank now has $500 in excess reserves.

Question

Umesh Kurwade · Accepted Answer

Final Answer : C, Explanation :  The required reserve ratio is 0.1, which means that for every $1 deposited, the bank must hold 10 cents in reserves. When Linda deposited $4,000, the bank must hold $400 in reserves (0.1 x $4,000 = $400). The bank increased its reserves by $500, so it now has excess reserves of $100 ($500 - $400 = $100). The bank doesn't have to lend out any additional money to increase its reserves. Choice A is incorrect because the bank could have increased its reserves by other means, such as borrowing from the Federal Reserve or accepting deposits from other customers. Choice B is incorrect because $500 is the value of the bank's total reserves, not just its required reserves. Choice D is incorrect because only the bank's assets increase by $500, while its liabilities remain unchanged. Choice E is incorrect because the bank must hold $400 in required reserves, leaving only $100 in excess reserves.

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