# econ

On January 3, Logan Industries deposited \$1,000,000 in cash at Federal Savings Bank. No excess reserves were present at the time Logan made the deposit and the required reserve ratio is 10%. What is the maximum amount by which Federal Savings Bank can increase its lending? A) \$100,000. B) \$900,000. C) \$10,000,000.

C

B. (1,000,000 / .10) - 1,000,000 = 9,000,000. You need to keep 10% of the 10m on reserve.

B isn’t 9,000,000, it’s 900,000 Not going to make much on that kind of leverage.

The multiplier is 1/reserve requirement, which is 10. They can lever up 10 times. 9,000,000 isn’t a choice.

yes the answer is c… 1/.10*1,000,000 = 10,000,000

Thanks guys… was skeptical when I picked it…knew wouldnt be that st8 forward. Agree C… qn asks max amount.

Whoops didn’t see that. Guess I’ll learn to be more careful.

B is the answer, and I need an explaination for that, is it because here they are talking about the federal savings bank, which only lends to other banks and not to general people. so it will keep the amount equal to bank reserves and loan the rest to a bank???

i dont get this…its given wats the max amount by which fed reserve can increase its lending…i guess the multiplier effect is wat comes in here…confused dat the answer is B…

When I first read the question I deduced the answer to be B but then read all these posts and got confused. The question is simply asking how much more does the Federal Savings bank can lend now. Since it has to retain 10pc it can now lend 900,000. Multiplier effect means, when the bank increases its lending by 1, how many times that dollar exchange hands. Example: IF the bank increased it lending by 1, that dollar will be borrowed by guy A, which will pay it to guy B for some good or service, who in turn will pay to guy C for some other good/service before it comes to the bank again as a saving. Hope my post does nt have data mining bias

oh ok…i think i got it nw…d question is simply asking how much it can lend given a reserve ratio…thanks acer

right on acer…fractional banking system. keeps the reserve, lends the rest. multipliers a different ball game

gauri Wrote: ------------------------------------------------------- > B is the answer, > > and I need an explaination for that, is it because > here they are talking about the federal savings > bank, which only lends to other banks and not to > general people. > > so it will keep the amount equal to bank reserves > and loan the rest to a bank??? It’s not the Federal Reserve, it’s a fictional bank name they created.