Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bank can lend out 80% of the deposits
B
The bank must keep 20% as reserves, limiting loans to 80% of deposits
C
The bank can only lend the exact amount of new deposits
D
The reserve requirement has no impact on loan creation
Understanding the Answer
Let's break down why this is correct
Answer
A reserve requirement is the percentage of deposits that banks must keep on hand and not lend out. If the reserve requirement is set at 20%, this means that for every $100 a bank receives in deposits, it must keep $20 in reserve and can only lend out $80. This affects how much money the bank can create through loans because the more money it has to keep in reserve, the less it can lend. For example, if a bank receives $1,000 in deposits, it can only lend out $800 while keeping $200 as reserves. Therefore, a higher reserve requirement limits the bank's ability to create new loans and, in turn, affects the overall money supply in the economy.
Detailed Explanation
A reserve requirement of 20% means the bank must keep 20% of deposits safe. Other options are incorrect because This answer suggests the bank can lend out 80% of deposits without explaining the reserve rule; This answer implies the bank can only lend what is deposited.
Key Concepts
Reserve Requirements
Money Creation
Banking System
Topic
Reserve Requirements and Money Creation
Difficulty
hard level question
Cognitive Level
understand
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