Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
$100,000
B
$200,000
C
$300,000
D
$400,000
Understanding the Answer
Let's break down why this is correct
Answer
A bank must hold a fraction of its deposits as reserves, set by the reserve requirement. If the requirement is 10%, the bank must keep 10 percent of its deposits in reserve. With $1 million in deposits, 10% of $1,000,000 equals $100,000. Therefore, the bank must keep $100,000 in reserve. The remaining $900,000 can be used for lending or other activities.
Detailed Explanation
The reserve requirement says the bank must hold a portion of deposits safely. Other options are incorrect because A 200,000 reserve would mean the bank keeps 20% of deposits, not 10%; A 300,000 reserve would imply a 30% reserve rate, which is higher than the stated 10%.
Key Concepts
Reserve Requirements
Topic
Commercial Bank Reserves
Difficulty
easy level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1If a bank is required to maintain a reserve ratio of 12% and it has total deposits of $2 million, how much must it hold in reserve?
easyEconomics
Practice
2
Question 2A 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?
mediumEconomics
Practice
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