Table 29-4. The First Bank of Fairfield

question 245

Multiple Choice

Table 29-4.
The First Bank of Fairfield
-Refer to Table 29-4. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be

• A)$40.
• B)$437.50.
• C)$71.42.
• D)$428.57.

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Definitions:

Interest Tax Shield

The tax savings achieved by deducting payable interest on debt from taxable income, thereby reducing the overall tax expense.

Deductibility

Deductibility refers to the eligibility of an expense to be subtracted from gross income to reduce taxable income, under tax regulations.