Question:
Assume that one of the commercial banks in the banking system has excess reserves of Rs. 400 million and the statutory reserve ratio is 20%. Meanwhile, a customer of this bank deposits Rs. 25 million in his current account and the bank lends Rs. 120 million to another customer. How much additional lending can be granted by this bank now?
(1) Rs. 2 125 million
(2) Rs. 2 005 million
(3) Rs. 425 million
(4) Rs. 305 million
(5) Rs. 300 million
Correct Answer:
(5)
Answer Explanation:
Initial excess reserves = 400. The new deposit is 25. With a 20% reserve ratio, the bank must keep 5 (20% of 25) and adds the remaining 20 to excess reserves. Total excess reserves = 400 + 20 = 420. The bank then lends out 120, taking that money out of excess reserves. Remaining excess reserves (additional lending possible) = 420 – 120 = 300.
Topic: Money and Banking Year: 2020
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