Question

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, what is the maximum amount the bank can hold as loans?

Answer 1

Money available for loans is $18,750

Step-by-step explanation:

The formula for calculating the total amount of money a bank can loan is:

money available for loans = (1 - required reserve ratio) x total deposits

money available for loans = (1 - 25%) x $25,000 = 75% x $25,000 = $18,750