If a Bank That Faces a 10% Reserve Ratio Received

question 125

Multiple Choice

If a bank that faces a 10% reserve ratio received a deposit of $50,000 and makes a loan to a customer for $5,000,what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

• A) Excess reserves increase by $50,000.
• B) Excess reserves increase by $45,000 and required reserves increase by $5,000.
• C) Excess reserves increase by $5,000 and required reserves increase by $45,000.
• D) Excess reserves increase by $40,000 and required reserves increase by $5,000.
• E) Reserves are not affected.

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Definitions:

Unlevered Firm

A business that operates without any debt financing, using only equity for its operations and investments.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost.

Homemade Leverage

The use of personal borrowing to adjust the overall level of financial leverage that an individual utilizes in their investments.

Capital Structure

Describes the mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, used to finance its overall operations and growth.