Question:
Businessman deposits Rs. 50 000. Bank holds no excess reserves and SRR is 10%. How will this deposit increase bank’s required reserves and lending ability?
(1) RR: 50 000 / Lend: 40 000
(2) RR: 50 000 / Lend: 50 000
(3) RR: 40 000 / Lend: 5 000
(4) RR: 5 000 / Lend: 45 000
(5) RR: 500 000 / Lend: 5 000
Correct Answer:
(4)
Answer Explanation:
The Statutory Reserve Requirement (SRR) mandates the bank to keep a percentage of the deposit as liquid cash. Required Reserves = $10%$ of $50,000 = 5,000$. The remainder of the deposit becomes the bank’s “excess reserves,” which dictates its immediate lending ability. Lending Ability = $50,000 – 5,000 = 45,000$.
Topic: Money and Banking Year: 2024
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