Question

A bank currently has \(100,000 in checkable deposits and \)15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ______ in money-creating potential. If the reserve ratio is 14 percent, the bank has _______ in money-creating potential

a. \(20,000; \)14,000

b. \(3,000; \)2,100

c. −\(5,000; \)1,000

d. \(5,000; \)1,000

Short answer

The correct option, in this case, will be ‘c. -$5,000,$1000’.

Step-by-step solution

Step 1. Explanation for the correct answer

The money-creating potential of banks is equal to the difference between the actual reserves andthe required reserves. If the reserve ratio is 20 percent, the required reserve will be 20 percent of the checkable deposit, i.e., 20% of $100,000, which is $20000. The actual reserve is $15,000, which means that the money-creating potential is -$5,000.

If the reserve ratio is 14 percent, the required reserve will be 14% of $100,000, which is $14,000. The actual reserve is $15,000, which means that the money-creating potential is $1,000.