The current balance sheet of the Iron Bank is given below. The reserve requirement is $10 \%$.
\begin{tabular}{ll}
Assets & Liabilities \
\hline Reserves: $\$ 3,000$ & Loans: $\$ 22,000$ \
Demand deposits: $\$ 25,000$ & Owners' equity: $\$ 0$
\end{tabular}

If Hodor deposits $\$ 100$ in the Iron Bank, what will be the dollar value of new loans that the Iron Bank can make?

Choose 1 answer:
(A) $\$ 22,590$
(B) $\$ 590$
(C) $\$ 500$
(D) $\$ 100$
(E) $\$ 90$

Question

The current balance sheet of the Iron Bank is given below. The reserve requirement is $10 \%$.
\begin{tabular}{ll} 
Assets & Liabilities \
\hline Reserves: $\$ 3,000$ & Loans: $\$ 22,000$ \
Demand deposits: $\$ 25,000$ & Owners' equity: $\$ 0$
\end{tabular}

If Hodor deposits $\$ 100$ in the Iron Bank, what will be the dollar value of new loans that the Iron Bank can make?

Choose 1 answer:
(A) $\$ 22,590$
(B) $\$ 590$
(C) $\$ 500$
(D) $\$ 100$
(E) $\$ 90$

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Calculate the total reserves after Hodor's deposit: $3000 + 100 = 3100$ ‖ ‖ step 2 ⋮ Calculate the required reserves with the new demand deposits: $0.10 imes (25000 + 100) = 0.10 imes 25100 = 2510$ ‖ ‖ step 3 ⋮ Calculate the excess reserves available for new loans: $3100 - 2510 = 590$ ‖ ∻Answer∻ ***B*** ∻Key Concept∻ ⚹Excess Reserves⚹ ∻Explanation∻ ⚹Excess reserves are the funds a bank has beyond the required reserves, which can be used to make new loans.⚹◊What is the formula for calculating the maximum amount of new loans the Iron Bank can make after Hodor's $100 deposit, given a reserve requirement of 10%⍭ Generate me a similar question◊

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