A Bank Has Excess Reserves of $5,000 and Demand Deposits

question 44

Multiple Choice

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is

• A) $1,500.
• B) $2,000.
• C) $2,500.
• D) $3,000.

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Definitions:

Future Cash Flows

Estimated future financial transactions that involve the inflow or outflow of money over a period of time.

Capital Cost Allowance

Refers to the depreciation expense that a company can claim for tax purposes on tangible and intangible assets over their useful life.

Tax Shield

The reduction in income taxes that results from taking allowable deductions from taxable income.

Depreciable Asset

A depreciable asset is a type of property that an organization can write off as an expense over time due to its potential to lose value, such as buildings, machinery, and equipment.