A local bank has determined that it has $1 million in total deposits. According to the reserve requirement set by the central bank, the required reserve ratio is 10%. The bank has $120,000 in reserves. How should the bank adjust its reserves to comply with the reserve requirement, and what does this indicate about its capability to lend?

The bank needs 10 % of its $1 million in deposits as reserves, so it must keep $100,000 on hand. It currently has $120,000, which is $20,000 more than required. Because it already meets the requirement, it can safely lend out that extra $20,000 without violating the reserve rule. This shows the bank has a small lending capacity of $20,000, while the rest of its deposits are still fully backed by reserves. In practice, the bank could keep the extra reserves if it wants to be conservative or lend them if it wants to increase lending.