Suppose for a bank, the reserve-deposit ratio is 0

Economics Dec 17, 2020

Suppose for a bank, the reserve-deposit ratio is 0.25 and it has $100 million as deposit and $50 million as reserves. The bank has too few reserves and should reduce its lending, has too many reserves and should increase its lending. has the correct amount of reserves and outstanding loans. should increase the amount of its reserves. Q 7 étv A MacBook Air go 000 000 F4 DU F8 F3 F5 F6 F7 % &

Expert Solution

The correct answer is (b) has too many reserves and should increase its lendings. This is because the bank's required reserve deposit ratio is 0.25 but its actual reserve deposit ratio is 50/100 = 0.5. So, even is bank reduces its reserves to $25 million, and lend the the remainig $25 million reserves, it will still be able to maintain its reserve deposit ratio.

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